It has been an absolute “clown car” of Central Banker / “Official” Authorities activity / behavior – contradictory and incoherent policy vs forward guidance language, projections and interventions – within the past 24 hrs with two standouts according to Nomura’s Charlie McElligott:
1) “hawkish no dovish no hawkish” Fed / Powell press conference experience:
Here were the main head-scratchers and complaints on Powell (and the FOMC’s controversial latest projections) which led to the incredible “HAWKISH!…no NOT HAWKISH ENOUGH so DOVISH!…EHHH I guess HAWKISH again!” whip-saw price-action across Assets during his press conference:
Chair Powell’s usage of questionable “sloppy”–yet seemingly intentional–language surrounding the concept of running “restrictive,” where he first qualified it as needing to run “…sufficiently restrictive,” then later, “…meaningfully restrictive”—why the heck are you using off-setting / minimizing language TWICE in order to soften the impact of the entire concept, in a job where every single word is measured?
Even more questionable were Powell’s borderline comical comments that claimed Fed policy is ALREADY INTO “restrictive territory” (“we’re at the very lowest level of what is restrictive”), which is “peak eyeroll” for most market participants who would beg to differ, but also again, a notable “less hawkish” change from the prior July statement which he KNOWS will be noted by the market
A bizarre but obviously intentional “dovish caveat” to the dot plot from Powell noting that “a large group saw 100bps of hikes by year-end,” despite the Median ’22 dot implying another 125bps (fwiw, we continue to expect 75bps in Nov and 50bps in Dec, along with a further 25bps in Feb ’23—overall targeting a “Terminal” rate of 4.50-4.75%)
Perhaps the largest gripe—and touching upon the dreaded and eternally debated concept of “Fed credibility,” which is a fruitless exercise in semantics and the Central Bank’s ability to “move the goalposts mid-game” in my eyes most of the time and was unfortunately again in question—occurred after the awkward and almost casual disregard of the 3.1% PCE forecast for ’23 as something that somehow is just going to be tolerated, despite running explicitly against target and mandate—yet theoretically is going to be effectively managed by the Chair’s plans to run just “modestly restrictive” policy?
And mind you further-out, the various projections get even dicier—PCE is somehow getting back to 2% with the unemployment rate peaking just above 4%?? Discussing the difficultly in engineering a “soft landing,” yet the median real GDP forecast in the SEP remains above 1.0% from 2023 to 2025?…Got it…
Tying it all together, in what universe can one argue that policy is already “restrictive” and only going to “sufficiently restrictive” at the same time where you are projecting that ongoing core inflation is going to be running above 3% for the next 18 months?!
2) the absolute SCENES out of Japan between the MoF, the BoJ and their incoherent behaviors…
Japan’s MoF officially intervened with “bold action” in the currency market overnight to reverse proclaimed “sudden, one-sided” moves in Yen (LOLokay), which is indeed slamming the breaks on the US Dollar’s stunning ascent that culminated post- Fed / Powell yesterday, after having made fresh 24 year highs vs Yen (and with the broad US Dollar Index overall having earlier made 20 years highs vs the basket)
From the “You Can’t Have It Both Ways” files: HILARIOUSLY, this Japanese Ministry of Finance “Yen-tervention” occurred shortly after BoJ Governor Kuroda insisted earlier on Thursday that the central bank will not raise interest rates or change its forward guidance for policy rates for “a few years” (!!!), while simultaneously pseudo-griping about the weakness in Yen—and all after their ongoing policy and operations saw benchmark 10Y JGB’s not trade (literally ZERO trades) for the second consecutive day on Wednesday, in the first such occurrence since 1999, as further proof of the bastardization of markets through their zombie “easing” policy
The larger holistic takeaway is a simple iteration that Central Bank / Financial Authorities need to get back to the business of SAYING LESS.
So having said all that, McElligott notes that Larry Summers – love him or hate him – continues to “get it right” on this particular point, dropping the “Too Much Information” bomb on the Fed, which merited an actual “laugh out loud”:
From a cross-asset markets impact, the price-action and positioning in “macro trend trades” playing for “Tight financial conditions” will continue to be the focus – so there is no better area to watch than our CTA Trend signals and positioning.
Finally, McElligott warns that prices are now closing-in on next “-100% Short” triggers across Global Equities…
…keying on S&P 500 (selling under 3758 for today), Nasdaq (selling under 11,525 today) and Eurostoxx (selling under 3428 for today)…
Additionally that chasm between bond vol and equity vol (i.e. VIX, VVIX, SKEW/SDEX) remains extremely wide.
Nothing says this spread has to collapse, however we remain of the opinion that equities cannot hold a material, sustainable rally (5-10% equity rallies have been disappearing at lightning speed) until that MOVE index shifts back down <=100.
As long as the MOVE remains this elevated, tail risk remains elevated, and overall volatility likely remains high.