US indices on Wednesday's close: SPX: (-1.54%), NDX: (-2.29%), Dow: (-1.49%) and RUT: (-2.03%)
After the expected quarter point rate hike - and some less than appreciated remarks during the press conference that followed – figuratively, at least, market participants dropped to the kitchen floor and kicked their collective legs furiously while shrieking in protest over the amount of ice cream...er…liquidity that was doled out; it was less than expected. New YTD SPX lows were seen even as the VIX remained subdued. It did not matter that the rate hike plan was changed from three hikes to two hikes for next year. It did not matter that there was an injection of flexibility added to that plan. Neither did it matter that the amorphous long term neutral rate was lowered from 3% to 2.8%. FOMC statement
ESH19 overnight session was balanced and net long and the RTH session was well up into the FOMC announcement as SPX vacillated between 20 and 30 points higher than yesterday's close. The initial reaction to the announcement was down then back up…but soon after the press conference began, things started to deteriorate. USD index, which had been down earlier, repaired to the upside and finished slightly higher. The benchmark 10-year futures went from red to flat and then spiked higher with yields falling and the 2-year to 10-year spread tightening as the press conference progressed. A long spike lower to ESH19 2489.50 and SPX 2488.96 then took place…a tantrum! SPX closed at 2506.96. Overnight action and tomorrow's open will depend on how all this input is digested. NYSE A/D lines: -1357. NYSE breadth: -3.24:1 and NASD breadth: -5.73:1.NYSE MOC imbalance closed +232M to buy while VIX ended perfectly flat.
Going into the conference, the market came off initial lows and was back into the green until the Fed Chair was asked about whether the future economic environment would alter the run off of the Fed's balance sheet. His response was that the run off is working well and the inference was that it would not be altered. He stipulated that rate hikes or the lack thereof were the best way to cope with changes to the economy.The market promptly fell from there and the 10-year yield dropped progressively as the Chair continued to answer questions.
The Fed Chair did state several times that the rate increase plot for next year was data dependent, adding that inflation was a bit below expectations. Uncertainty about and flexibility around the trajectory as well as data dependency was stressed.
The Fed Chair replied to several questions about the president's tweets, saying that the FOMC was not swayed by them in any way and that the input on which the Committee acts is from a broad range of sources, many beyond the capital markets.
Fed Calls the Market's (and the president's) Bluff
Today, the Chancellor of the Exchequer (FOMC Chair) hit the shuttlecock into the King's (the president's) court. The FOMC's message to the president as far as I can tell - aside from a flexible stance and two instead of three 2019 hikes - is that if the king and court want risk asset prices climbing they'll have to do something about the trade war tactics. In other words, the Fed seems to have refused to enable or provide margin for more chaos from the executive. The problem with that kind of independent monetary policy backbone is that the president will delight in blaming the Fed for whatever happens to the market. History books and their sober readers will of course see such accusations as nonsense, but that doesn't matter for this month's stock prices.
Market participants might take away at least one clear message from today's FOMC statement and press conference: Our executive political leadership might resemble a tin pot dictatorship, but our Federal Reserve is not staffed by patsies. They chose to be fleet footed and to avoid the appearance of capitulating completely to outside forces -- be they risk asset devaluations or political pressure.The next 12 to 24 hours will be crucial as SPX 2510 is an area where funds might see an opportunity to adjust their books to the upside into the end of the year. A failure to do that gets bears scrutinizing the SPX 2400 level. The overnight futures action is often inconsequential; but everyone and their dog will be watching the open.
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