Turbo-Taper Sparks Market Turmoil; Yield-Curve, Dollar Signal ‘Policy Error’

December 15, 2021   |   Tags:
Turbo-Taper Sparks Market Turmoil; Yield-Curve, Dollar Signal 'Policy Error'

We have something to get off our chest that it appears no reporters had the balls to ask Jay Powell during the presser:

Based on the taper/dotplot/SEPs, how exactly will tighter financial conditions lead to faster GDP growth, higher inflation and lower unemployment...?

Money markets now see a 90% chance of an April rate hike...

Source: Bloomberg

Additionally, the market is pricing in a regime-shift back to rate-cuts in late 2024, early 2025...

Source: Bloomberg

Powell did the usual 'walk-back' of the statement's hawkishness in the press conference (throwing out every caveat imaginable)...

...but the dollar was the arbiter of truth and shifted rapidly from stronger to weaker as he spoke...

Source: Bloomberg

This shift, along with the 'inversion of the forward curve, signal The Fed will make a policy mistake and be forced to reverse its rate-hiking path sooner than later. And, we wonder out loud, if that is what prompted the gains in the stock market against this uber-hawkish statement. Nasdaq literally exploded higher, ending up a stunning 2.3%, while The Dow lagged, up only 1% on the day...

The Dow burst back above its 50EDMA today and Nasdaq, which opened below its 100DMA, burst above that and extended above its 50DMA...

While cyclicals outperformed from 1430ET (FOMC), Defensives outperformed easily on the day...

Source: Bloomberg

As we tweeted:

Graphically it looks like this - The Fed is now 'more hawkish' across the entire curve than the market...

Source: Bloomberg

The entire yield curve rose around 2-3bps on the day...

Source: Bloomberg

With the yield curve itself dramatically flattening then retracing...

Source: Bloomberg

Cryptos stormed higher after Powell said "cryptos are not a threat to financial stability"...

And Bitcoin jumped up above $49k on it...

Source: Bloomberg

And Ethereum surged up to $4100

Source: Bloomberg

Commodities lifted on The Fed and accelerated as the dollar dived.

WTI ramped up above $71.50...

Gold puked as it does on Fed day but the dollar's drop on policy-error fears sent gold spiking higher...

 

 

 

Finally, is this the analog to trump all analogs - comparing Cathie Wood's ARK Innovation ETF to the late-90s/early-00s Nasdaq 100..."You Are Here"...

Don't forget, big OpEx on Friday with lots of gamma to 'unclench'.

The other interesting scenario here is that the market catches a bid from Powell’s appearance. Typically the Fed tries to placate markets, and implied volatility (“event volatility”) subsides.

In this case the vanna/charm flows may kick in pre-OPEX, leading to a sharp rally into Friday (after 4 straight down days for Goldman's 'most shorted' stocks).

This scenario could be the trickier one, as a short cover relief rally could lose steam post OPEX.

 

Tyler Durden Wed, 12/15/2021 - 16:00


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