Stocks Rise As Fed Signals Uncertainty Lies Ahead
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Stocks managed to gain back almost exactly what they lost yesterday, finishing the day up about 1.1% to close essentially unchanged at Monday’s close at 5,675. The equity market did its usual post-FOMC volatility reset, and once that reset was complete, the sellers could take over.
The VIX 1-day was acting odd to start the day, trading much lower than I would have expected around 12 PM ET. However, it saw a rapid rise, reaching 24, and then cratering once the FOMC statement hit the wires. This was followed by the usual secondary drop around 2:40 ET. But once the press conference was over, at 3:15 PM ET, the volatility reset was over, and trading appeared to resume normally.
The one thing that seemed to come from today’s meeting is that the Fed is as equally confused by what is heading the economy’s way as anyone else. That was fairly obvious, with them leaving the rate cut projections unchanged from December while downgrading their growth prospects and upgrading their inflation outlook.
The only thing that seemed clear is that USDJPY strengthened materially following the release of the FOMC statement at 2 PM ET.
That is because the spread between the US 10-year and the 10-year JGB fell by 6bps on the day. Perhaps more importantly, it fell out of the wedge pattern noted last night.
We will not know the outcome until this evening when Japan opens again, and we will see which way JGBs trade. But if yields continue to rise, the USDJPY will likely strengthen further. The movement of rates in Japan may not matter much because if the bear pennant on the US 10-year broke today, the 10-year is probably heading lower and potentially back to that 4.1% region.
A drop in the 10-year rate and a weaker dollar would probably be all that is needed to know where the market sees the US economy heading. This would be exactly the opposite of what we saw following the September FOMC meeting when the 10-year yield rose by 100 bps.
The message could very well be one of the Fed overstaying its welcome.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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