Wednesday, May 20, 2015
Fed Minutes; Keeping the Market Honest
The long holiday weekend approaches and the Fed offers Minutes from the April FOMC meeting. The former would encourage those who have larger repositioning duties to get right to work while the latter might prompt a wait and see.
Trade finishes early on Friday with Monday as a holiday. Those who have some position work to get sorted before the weekend will want to take care of that either today or tomorrow, else find themselves pushing the market around in the quiet trade on Friday morning. At the same time, market participants are eager to learn how the FOMC members (and staff) discussed economic and financial conditions in the 2-day April meeting. Despite promises that the Fed is data-dependent, we all know it is how the Fed reads the data that will determine the timing of the ‘normalization’. As such, understanding the views expressed at the April FOMC meeting will help market participants better determine the likely timing of ‘lift off’ and what variables might be key to that timing. This could argue for waiting till the market digests the Minutes before repositioning.
The big question for those who need to position is where the risk is in the FOMC Minutes? In March, the Fed surprised by greatly reducing the implied path for fed funds in the Summary of Economic Projections (SEP) and again reducing the longer-run central tendency for the unemployment rate. This announcement ushered in a strong fixed income advance. My sense is that the Fed at this time does not have as great an interest in providing bullish fixed income surprise. Economic data has been mixed to soft with the exception of employment. Wage pressure while bubbling has not yet found consistent gains. The front end of the Treasury curve has seen lower rates since March and a bullish surprise in the Minutes today could bring rates to unrealistically low levels should economic data improve as many expect.
I have been drawn to the chatter of a number of Fed officials, particularly Williams, Dudley and Yellen that leaves me believing if there is a surprise in the Minutes today, it will be that the front end of the curve has not priced enough chance for fed funds lift-off and multiple firming of policy in 2015. The Fed is data-dependent, but consistent with the Fed’s read of that data and their interpretation of future developments.
For guide, EDZ5 (December 2015 Eurodollar future) trades at 99.43 and near the 99.465 contract high reached on May 14th, 15th and 17th. Technically, it found support this morning at a bullish upward sloping trend line dating from early-March. The ‘doji’ of May 15th suggests indecision and the declining price action of the last two sessions suggests bearish implications.