I posted a longer hit on the topic of a possible and widely underappreciated stealth US Treasuries rally in the making last week – recommended reading, even if only to balance the bondpocalyptic froth that has built up since talk of the Fed tapering LSAP began in May – but wanted to circle back around to the topic as we enter the pre-FOMC, pre-taper weekend.
For the most part, the Fed has been very quiet for a very long time about what they might do at its coming policy meeting. No matter, though: that vacuum is all-too-eagerly filled by the near-unanimous consensus of the elite coterie of economists and analysts paid to speculate about it that the “serially overoptimistic” Fed will taper at September’s FOMC meeting on 09/17-09/18.
Estimates of how much the taper will amount to and whether it will be all US Treasuries, all MBS or some amalgam thereof are the arcane details being augured now. The figure most often thrown around after early September’s raft of macro data is a reduction of monthly UST purchases by $10 Billion, taking them down to $35 Billion and thereby easing the Fed’s monthly “pressure on the accelerator” from $85 Billion to $75 Billion.
But whether the FOMC does taper or not – and if they do to what degree – are questions easily asked and answered, as relentlessly demonstrated over the last 4 months.
It’s difficult to believe the FOMC will disappoint such broad taper expectations. Deciding against a reduction, coming in too hot – $20 Billion+ – or too cold – Nothing to $5 Billion- would only further muddle and obfuscate its intentions in a time when it is desperately attempting to offer forward guidance with unprecedented transparency. The Fed knows, however much it postures behind white papers that provide intellectual justification for its unconventional actions, that its effectiveness relies solely on its credibility – a credibility that has been challenged more in the last 4 months than in the previous 6 years.
Taking all this under thoughtful consideration: for someone who actively invests in their portfolio or trades around price the far more important question in all of this is: what will bonds do? That question gets much less play: certainly not from the Fed, though it’s obsessed with that very question in private. The answer isn’t likely to be as simple and intuitive – taper = bond selloff; no taper = bond rally – as commonly suggested.
When it comes down to it, a single chart matters going into this. It is – at least for this moment in time – justifiably called “the most important chart in the world”.
Housing, sentiment, capital flows, the direction of the US Dollar – so much is either entirely bound up in or largely affected by what happens here next.
Will the 10-Year holds its rising trend line?
Will the hammer candlestick it has created thus far on the month grow into a larger reversal post-FOMC?
Will the dense field of fibonacci cluster support (gray horizontal lines, denoted by blue rectangle) hold as it did in the opening days of September?
No matter how you invest, or what you trade, few instruments will be indifferent or immune once the FOMC has its say and markets begin to assess and reassess the implications of its decision. 09/18’s announcement may spark that stealth US Treasuries rally that the proverbial “blood in the streets” seems to portend – or it might not.
Whether the world knows it or not, there’s a lot riding on the fate of that little white diagonal line next Wednesday.
Twitter: @andrewunknown and @seeitmarket
Author holds no positions in instruments mentioned at the time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
