Thursday, December 18, 2014
How Do You Spell ‘NORMALIZATION’; VIX & MOVE PLUMMET
In the last 5 years, the Move (Merrill Treasury 1-month Implied Volatility Index) has not fallen as much in a single day as it did last Friday. The VIX had not fallen as much as it did yesterday since December 2012.
I have been advancing the notion that after the Fed makes more clear its intention to proceed in raising the policy rate, there will be a lot less uncertainty and that stocks would rally, Treasuries and Eurodollars would see higher yields and oil and gold would move higher.
The change in MOVE and VIX support this view. The 50 day moving average in both indexes were at multi-year highs, a situation I noted in my FOMC Report. Those higher levels were consistent with a very difficult read on where Fed policy was headed. While some pundits say that there remains uncertainty in Fed policy, I think that the Fed’s intent is very clear. If economic and inflation data continue at or near current pace, the Fed will remove accommodation starting as soon as April, though more likely June and still possibly July. There is a lot of comfort in knowing Fed policy path and markets are starting to reflect this.