Wednesday, June 17, 2015

NASDAQ to be volatile around Fed FOMC announcement

The market will be prone to very erratic trading leading into and following the Fed FOMC announcement and press conference this afternoon, and in fact volatile all day and a couple more days beyond today. I don't expect any major surprises or decisions from the Fed today, but definitive relief that there really is no major news or unexpected decision is likely. I don't expect that the Fed will signal whether liftoff will be in September, October, December, or January, but I am sure that a lot of people will claim that they are signalling in some odd implied manner. Fed funds futures, the most reliable indicator, still point to December with an outside possibility of October, and essentially no real chance of September.

NASDAQ futures are bouncing around near flat at this moment, indicating a mixed open. As always, we must caution that futures and the opening move are frequently not reliable indicators of the market trajectory for the rest of the day, especially on a Fed announcement day. We could see either a rally or weakness ahead of the announcement, a reversal right after the announcement, and then yet another reversal as the press conference proceeds, and then yet a final reversal going into the close. Or not. The only safe bet is volatility.

Meanwhile, the economy continues to plug away at a semi-decent but erratic pace, which is relatively good for stocks, but also assures that we don't build up too much of an irrationally exuberant bubble. I still expect June to be a relatively flattish month, give or take a percent or two, or maybe even three.

It is worth noting that the Fed does not directly control all interest rates. In fact they only control two, the fed funds target rate and the discount rate. Sure, the target rate has an outsize impact on all other rates, but the market will determine Treasury, corporate, and municipal interest rates. Even T-bill rates, the closest proxy to the fed funds target or overnight inter-bank lending rate, are determined by the market, and will trade at a discount or premium to the fed funds target rate based on supply and demand. 2-year, 10-year Treasury notes and the 30-year long bond will be even less directly influenced by the Fed funds target rate, with market forces more focused on the economic outlook, inflation, dividend yields, and safe-haven demand as well. The spread between corporate debt and Treasures is determined by market forces as well. Confidence in the economic outlook as well as the inflation outlook will whipsaw debt security prices a lot more than the small, incremental moves by the Fed in the fed funds target rate. In short, even if we have a clear trajectory from 0.25% to 1.00% next April, that tells us very little about where Treasury and corporate interest rates will be over that period, other than volatile, and more dependent on how the economy performs and is expected to perform, and what safe-haven demand might evolve over that period.

Greece? The political theater is getting to the feverish pitch stage, which is great entertainment, but doesn't belie the fact that both sides know that a deal will get done in the eleventh hour. This won't be some grand final deal, just a stop-gap measure as negotiations progress over the next year. I'm not sure which is easier to accept, that a deal will happen, or that any deal will be rather ugly and unpalatable to just about everybody involved.

-- Jack Krupansky

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