Mon Aug 31 2015
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Citi Finally Admits The Truth About The Fed


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Back in April, when Bill Dudley first admitted that the Fed’s rate hike will be “shaped party by the market reaction”, we first coined the term Dow Data Dependent. Some mocked this assessment, but 5 months later it has proven to be spot on, following Bill Dudley’s repeat appearance in which he cautioned that a September liftoff looks “less compelling”, catalyzing the biggest two-day surge in the Dow Jones in history. Today, Citi admits that the “Dow” is precisely the only “data” point that the Fed cares about.

From Citi’s rates strategist, Jabaz Mathai:

All the components for the US growth index have been reasonably strong over the last few months, and this was reinforced by the higher than expected revised second quarter GDP estimate released yesterday (3.7% vs. a Bloomberg median survey estimate of 3.3%). On the other hand, the global growth index is treading water. The Fed has to decide whether to hike based on domestic economic strength and the unsuitability of zero rates and super accommodative policy in the context of current growth or to hold back to better understand the disinflationary impact of slower external growth.

The market has already delivered its verdict swiftly in the face of the global equity market correction– reducing substantially the probability of a rate hike in September, and pricing in a full rate hike only by March next year. We assign a higher probability than the market for a lift off in September but acknowledge that the risk has shifted towards later, a slower pace and a lower terminal rate. For now, we hold on to the put on EDU5 that we initiated two weeks ago.

“Data dependency” over the next couple of weeks might really mean “equity market dependency”. If the equity market drops 10%, the Fed will most likely not hike, no matter what the payrolls data is.

And there you have it: the “smartest central planners in the room” are nothing more than hostages to the “market” they created, a “market” which without explicit Fed support will tumble. In other words, the higher the market rises, the more likely the Fed will proceed with the rate hike which slams it right back down. And vice versa. It is no wonder air conditioners in the data centers housing the US algos farms and dark pools are overheating – not even the HFTs can make much sense of this particular circular logic.


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