FOMC: 06.38.30

The countdown to the Fed’s “decision” on interest rates is on. With great interest man and machine wait for the Fed to tell us what the wise guys at CME Group already know; there is no rate hike today.

The current stance of CME futures traders is a 97.5% chance for a hold and a 2.5% chance for a cut.

What’s more, as far out as January the picture only gets more dovish as despite the wonder rally in stocks CME futures shows a growing rate cut contingent. The projections for meetings in between today and January show a progressively stronger lean toward rate cuts as the months wear on.

The 2 year Treasury yield is playing its part in leading the dovish festivities. But more importantly than that, the 10yr-2yr yield curve is doing at least what it did at last September’s stock market top [Oh look! He’s calling a top!!!  Perma-bear in sheep’s clothing!!… Relax. I am just reporting facts].

The curve elevated to the late September top and then it spiked. So if the Fed wanted to ease this situation it could slip some none too dovish words into the statement or the chairman’s press conference afterward. That could tamp the 10yr down relative to the 2yr and put the curve back in line. But that is quite a digression at this point. If the Fed is wooing inflation, it may well want a rising yield curve for a while (since the curve can steepen under inflationary or deflationary stress).

2 year yield and yield curve

On to other views, the Fed could not woo inflation in Q4 2018 because the Continuum was already getting wigged out about it. Scores of casino patrons found themselves confused when the Fed remained hawkish despite the imploding stock market.

I stated then and state again now that the Fed was not going to abide a substantial breakout in the long bond’s yield, or else it would ultimately end the decades-old inflationary operations of the Fed itself. The Fed will logically choose survival (it is a blood sucking vampire after all) at any cost, stock market be damned.

But since the Continuum got back in order… voila! We have a dovish Fed. Funny how that works. Look no further for the answer to your questions about how the Fed could be hawkish in Q4 2018 despite declining markets and dovish now, despite rising markets.

And so we are left with the question of what to make of the disconnect between the 2 year yield and the S&P 500. The bond market’s signals are telling the Fed to remain dovish. The CME traders for one (group), believe the signals are true. The stock market is proceeding as if dovish=bullish.

Something similar happened with the 2yr yield and SPX in 2016. The yield diverged the market and the market was right.

The signals sure are screwed up and conspiracy theorists can’t really be blamed for having those thoughts. Thoughts that the great and powerful Oz controls all. Or that all you have to do is sit back, relax and…

“There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to – The Outer Limits.”

Unless of course just maybe the bond market is forecasting something that today’s stock market relief mania has not yet accounted for.

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