This note was originally published at 8am on June 11, 2015 for Hedgeye subscribers.
“It is dangerous for a bride to be apologetic about her husband.”
There are a lot of ways I can go with that quote this morning, but I’ll keep it above the belt. I read it as I was flying to LA from San Francisco last night. And I couldn’t stop thinking about Janet & Ben.
While Yellen isn’t married to Bernanke, she is wed to the policy expectations framework he created. While anything is possible when it comes to un-elected decision making on interest rates, I highly doubt she raises rates for the sake of the apologists.
Apologists? Yes. As in the every-other-meeting I’ve been in this week where a sophisticated Institutional Investor asks me “isn’t it just time she raises rates?” I promptly say no. Raising rates into a slowdown could easily perpetuate the next US recession.
Back to the Global Macro Grind…
Probably the sharpest bond guy I met with yesterday (incidentally, he carries one of the biggest bats in the bond buying game) A) agreed with me on the Rate Mistake call and B) took the reason for a potential Fed mistake one step further:
“My main concern isn’t that you’re wrong on the economy - it’s that you’re right (it’s #LateCycle slowing) and she (Yellen) takes this Global Bond Yield move as a signal that the coast is clear to get one-and-done (rate hike) on the tape.”
This is where the political and market pressures on this un-elected institution (The Fed) meets its maker – the data. I actually think Janet Yellen is much more “data dependent” than The Bernank ever was. She doesn’t need to apologize for that.
Neither do I need to apologize for all of us hanging on any tweet that leaks when the Fed is going to move. This is the centrally planned macro market America asked for. It’s our job to attempt to risk manage it.
So let’s give that a try and outline 3 baseline scenarios ahead of the Fed meeting next week:
- Yellen signals that after having missed their window to hike in 2013, “it’s just time” to raise
- Yellen signals that since the US economic data continues to slow, there’s no rate hike on the table until 2016
- Yellen signals that she remains “data dependent” (i.e. repeats what she said at the March 18th meeting)
While I believe scenario #3 is the most probable, Consensus Fear is that Scenario #1 is more probable than it was 10 days ago when the 10yr US Treasury Yield was 2.10%.
And, yes, since it’s all about the rate-of-change in probabilities, the proclivity for a bureaucrat to chase last price (2.49% on the US Treasury Yield) is rising right now, not falling.
What if Yellen opts for the rate hike? I think the Dollar rips and stocks, bonds, and commodities get slammed. But having watched all of these macro markets move for the last 3 weeks (all down) prior to yesterday’s bounce, you already know that.
She’ll have to cut! Yep, raise and cut. Huh? Correct – you can’t just chase bond yield charts and their correlated moving monkey averages and dismiss what I started this rant with this morning – the policy expectations framework that Janet & Ben created.
To review the Fed’s “data dependent” framework in its simplest of terms:
- As the data accelerates, expectations for higher interest rates do (see 2013 for details)
- As the data slows, expectations for lower interest rates do (see Q4 2014 to Q1 2015)
This is the bed that Bernanke built. And from what I can see, Janet isn’t apologizing for it. As a result, until she says otherwise, my expectation is that she is going to sleep in that bed, waking up every morning to the rate-of-change in the data.
In other news, the World Bank is the latest central planning outfit to cut both its US and Global Growth Estimates for 2015. They, of course, just pushed out the estimates for 2016 – which means they’ll inevitably have to cut those (again) too.
And in terms of non-rate-spike related ideas, I signaled to short the Yen yesterday and buy more of that Weimar Nikkei. The Japanese know very well what Slower-For-Longer looks like – they won’t divorce themselves from that rate policy anytime soon.
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.09-2.55% (bearish)
SPX 2075-2125 (neutral)
RUT 1251-1269 (neutral)
Nikkei 20049-20713 (bullish)
VIX 13.02-15.42 (bullish)
USD 94.06-95.84 (neutral)
EUR/USD 1.09-1.14 (bearish)
YEN 122.49-125.46 (bearish)
Oil (WTI) 58.81-61.98 (bullish)
Nat Gas 2.56-2.92 (neutral)
Gold 1168-1198 (bullish)
Copper 2.67-2.77 (bearish)
Best of luck out there today,