Showing posts with label Fed Funds Futures. Show all posts
Showing posts with label Fed Funds Futures. Show all posts

Tuesday, August 9, 2011

Market Reaction To FOMC Announcement





(Before data was taken at 2:00 pm, After data was recorded at market closing prices)

S&P 500
Before : 1138.64
After : 1172.53

Treasuries
2 year
Before : 0.27
After : 0.20
10 Year
Before : 2.33
After : 2.26
30 Year
Before : 3.68
After : 3.64


Inflation Expectations
2 year inflation swaps
Before : 1.43
After : 1.39

5 Year TIPS Breakeven rate
Before : 1.81
After : 1.78

10 Year TIPS spread
Before : 2.27
After : 2.22

30 Year TIPS spread
Before : 2.64
After : 2.61


Bloomberg Commodity Index
Before : 1601.42
After : 1598.48


EUR USD
Before : 1.4221
After : 1.4339


(Data from bloomberg.com)


The market reaction to the Fed announcement today was certainly interesting. Fed Funds Futures unsurprisingly fell in reaction to the commitment to leave them at 0% until 2013. Equities took a while to figure out how they felt, seesawing up and down before finally rising about 3% from their pre-meeting rallies. Treasury yields fell, especially at the medium end of the curve (only because the short end can't fall any further). Inflation expectations also fell slightly as well, along with commodities and the dollar. 

Personally I think the Fed announcement was underwhelming. Committing (whether loosely or strictly, no one really knows how serious they are about this commitment, or even whether it is a commitment at all - are they simply predicting they will need to do this?) to leaving rates at 2013 is another way of telling us that they predict a significant output gap will remain at least until then and won't take the necessary actions to do anything about it. Is there anyone who isn't thinking about Japan now?

The dissents are puzzling... if 3 members are going to dissent, why not do something more like lower interest on reserves? Maybe they would have had even more dissents if they did, if so, we are in serious trouble... if not, they obviously should have tried more. Christina Romer said the dissents might be a sign Bernanke is now more willing to work without unanimous approval of policies, but why not do more right now?

I don't blame markets for their "confusion"... I'm not really sure how to read this either. It was certainly better than nothing, but not much better. Much more stimulus is needed. Still, today once again demonstrated that markets don't buy either liquidity trap or easy money stories.
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Thursday, August 4, 2011

Fed Funds and Aggregate Demand 8/4/2011



S&P 500
May 11 : 1342.08
June 8 : 1279.56
July 7 : 1353.22
August 4 : 1200.07

Treasuries
2 year
May 11 : 0.55
June 8 : 0.38
July 7 : 0.47
August 4 : 0.26
10 Year
May 11 : 3.18
June 8 : 2.94
July 7 : 3.16
August 4 : 2.42
30 Year
May 11 : 4.29
June 8 : 4.19
July 7 : 4.38
August 4 : 3.69

Inflation Expectations
2 year inflation swaps
May 11 : 2.16
June 8 : 2.01
July 7 : 1.92
August 4 : 1.65
5 Year TIPS Breakeven rate
May 11 : 2.19
June 8 : 2.02
July 7 : 2.10
August 4 : 1.79
10 Year TIPS spread
May 11 : 2.42
June 8 : 2.27
July 7 : 2.49
August 4 : 2.22
30 Year TIPS spread
May 11 : 2.53
June 8 : 2.45
July 7 : 2.67
August 4 : 2.58

Bloomberg Commodity Index
May 11 : 1672.35
June 8 : 1713.68
July 7 : 1717.93
August 4 : 1660.55

EUR USD
May 11 : 1.4249
June 8 : 1.4577
July 7 : 1.4351
August 4 : 1.4105

(Data from bloomberg.com)

Expectations have fallen dramatically the last couple weeks. Fed intervention of some kind is likely, but we still don't exactly know what the Fed's goal is. Will they react to past inflation rates? Commodities? Job growth? Financial markets? Inflation expectations? Only the FOMC knows. We also don't know how they'll intervene exactly. Hopefully they'll try something more flexible than QE2 was.

Here are predictions I made a couple of months ago. I think they've held up pretty well. The only thing I was off on was underestimating the importance of Europe's debt troubles. Although Europe's woes are also caused by tight money (the European Central Bank seems more concerned with what's good for Germany than what's good for Europe as a whole), there's no reason they should be lowering U.S. NGDP unless the Fed doesn't respond to higher dollar demand... but the Fed isn't responding (at least not until things get really bad), so Europe's woes are lowering U.S. NGDP.
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Thursday, June 30, 2011

Fed Funds and Aggregate Demand 6/30/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 22 : 1287.14
June 30 : 1320.64

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 22 : 0.36
June 30 : 0.45
10 Year
April 27 : 3.35
May 26 : 3.06
June 22 : 2.96
June 30 : 3.15
30 Year
April 27 : 4.45
May 26 : 4.22
June 22 : 4.19
June 30 : 4.36

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 22 : 1.83
June 30 : 1.84
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 22 : 1.89
June 30 : 2.03
10 Year TIPS spread
April 27 : 2.60
May 26 : 2.34
June 22 : 2.24
June 30 : 2.48
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 22 : 2.39
June 30 : 2.65

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 22 : 1665.53
June 30 : 1667.7

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 22 : 1.4268
June 30 : 1.4496

(Data from bloomberg.com)

The potential resolution of the Greece crisis pushed markets in a positive direction this week. European debt problems could have potentially caused a flight from Euros into Dollars and since a higher demand for dollars could only have been offset by a larger supply, this would have required fed action... and we know how hesitant they are to act at a 0% fed funds rate.

If the economy can avoid any negative shocks the Fed might be able to get by without actions stimulus, but the recovery will likely continue at a "frustratingly slow pace" (to borrow a phrase from Bernanke) unless the Fed becomes willing to "put up with" higher NGDP growth.

One could put a positive spin on current events by pointing out that inflation pressures are non-existent and another commodity boom seems unlikely (given that the "boom" last year really just returned prices to pre-crisis levels). Year over year inflation should fall and it will be harder for inflation hawks to argue for tighter money under this scenario.

The problem with that argument is that the Fed already knows these things and still can't agree that money is too tight. The Fed has also shown how eager it is to tighten if things get even marginally better. I hope I'm wrong.
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Friday, June 24, 2011

Fed Funds and Aggregate Demand Watch 6/22/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 15 : 1265.42
June 22 : 1287.14

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 15 : 0.38
June 22 : 0.36
10 Year
April 27 : 3.35
May 26 : 3.06
June 15 : 2.97
June 22 : 2.96
30 Year
April 27 : 4.45
May 26 : 4.22
June 15 : 4.20
June 22 : 4.19

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 15 : 2.00
June 22 : 1.83
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 15 : 2.01
June 22 : 1.89
10 Year TIPS spread
April 27 : 2.6
May 26 : 2.34
June 15 : 2.29
June 22 : 2.24
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 15 : 2.44
June 22 : 2.39

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 15 : 1674.20
June 22 : 1665.53

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 15 : 1.4172
June 22 : 1.4268

(Data from bloomberg.com)

Expectations for aggregate demand continue to slowly deteriorate as the Fed maintains a "neutral" policy. 
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Wednesday, June 15, 2011

Fed Funds and Aggregate Demand Watch 6/15/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 8 : 1279.56
June 15 : 1265.42

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 8 : 0.38
June 15 : 0.38
10 Year
April 27 : 3.35
May 26 : 3.06
June 8 : 2.94
June 15 : 2.97
30 Year
April 27 : 4.45
May 26 : 4.22
June 8 : 4.19
June 15 : 4.20

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 8 : 2.01
June 15 : 2.00
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 8 : 2.02
June 15 : 2.01
10 Year TIPS spread
April 27 : 2.6
May 26 : 2.34
June 8 : 2.27
June 15 : 2.29
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 8 : 2.45
June 15 : 2.44

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 8 : 1713.68
June 15 : 1674.20

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 8 : 1.4577
June 15 : 1.4172

(Data from bloomberg.com)

Thanks to the beating stocks took today, data were once again mixed compared to last week. Stocks and commodities are signaling lower aggregate demand expectations, while the Euro/Dollar exchange rate and federal funds futures are signaling higher expectations. Despite a better than expected retail sales number (which was still negative), economic data has continued to disappoint. At this point, I consider "mixed" markets good news.
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Wednesday, June 8, 2011

Fed Funds and Aggregate Demand Watch 6/8/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 1: 1314.55
June 8 : 1279.56

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 1: 0.44
June 8 : 0.38
10 Year
April 27 : 3.35
May 26 : 3.06
June 1: 2.95
June 8 : 2.94
30 Year
April 27 : 4.45
May 26 : 4.22
June 1: 4.14
June 8 : 4.19

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 1: 2.05
June 8 : 2.01
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 1: 2.01
June 8 : 2.02
10 Year TIPS spread
April 27 : 2.6
May 26 : 2.34
June 1: 2.28
June 8 : 2.27
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 1: 2.42
June 8 : 2.45

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 1: 1691.51
June 8 : 1713.68

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 1: 1.4329
June 8 : 1.4577

(Data from bloomberg.com)

Markets were mixed relative to last week. Stocks fell, commodities rose, and bond yields were mixed. Expected fed funds rates fell in reaction to Bernanke's speech; whether this reflects easier or tighter policy isn't completely obvious, but the fact stock prices fell in reaction suggests the lower rates reflect tighter policy. All things considered, market expectations over the past week would be best labeled as "disappointing". I stick with my previous prediction.
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Wednesday, June 1, 2011

Fed Funds and Aggregate Demand Watch 6/1/2011 : Expectations Continue to Fall




S&P 500
April 27 : 1357
May 26 : 1325.69
June 1: 1314.55

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 1: 0.44
10 Year
April 27 : 3.35
May 26 : 3.06
June 1: 2.95
30 Year
April 27 : 4.45
May 26 : 4.22
June 1: 4.14

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 1: 2.05
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 1: 2.01
10 Year TIPS spread
April 27 : 2.6
May 26 : 2.34
June 1: 2.28
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 1: 2.42

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 1: 1691.51

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 1: 1.4329

(Data from bloomberg.com)

It's amazing how quickly things have gone down the drain since Bernanke's press conference. A lot of press coverage has focused on how the earthquake in Japan may be behind some of the disappointing economic data, but markets are signaling that longer term expectations have fallen as well.

Lower Fed Fund futures expectations, stock prices, bond yields, exchange rates, commodity prices, and inflation expectations are all signs of tighter monetary policy. Lower fed funds rates and treasury yields signaling tighter money may sound counter-intuitive, but the Fed won't raise rates until the economy is in better shape, and lower treasury yields reflect lower inflation and real growth expectations.

I hereby predict that 
1) Economic data will continue to get worse until the Fed intervenes in some manner. Markets have already priced in some response by the Fed, but every day without intervention will drive markets down further. Markets are waiting for easier money. (Translation: tight money is the economy's biggest problem)
2) Regardless of how the Fed intervenes, the direction of economic activity will quickly turn around, although the magnitude of the recovery depends on what method the Fed chooses in it's intervention (Translation : monetary policy doesn't have long and variable lags to the extent it is commonly believed)
3) Any kind of a long term anchor (explicit NGDP/CPI targeting) or adjustable policy (changing IOR or asset purchases monthly based on the latest data) will be more effective  than ambiguous and rigid policies (QE2, keeping the Fed Funds rate at 0% for "an extended period of time") (Translation: Monetary policy needs to commit to changing along with the state of the economy to be effective. It's not clear what rates of inflation the Fed is willing to put up with and what the Fed is willing to do to make sure it reaches its goals)

These are all verifiable predictions. We'll see how they do!
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