Critical Inflection Point


 

  • Market only pricing 35% chance for December liftoff
  • Recent data and EM stability suggests otherwise
  • USDJPY and SPX500 key markets to watch
  • Risks from here support USD upside, lower stocks

SUSPICOUS ODDS - We have reached a critical inflection point in financial markets this week, and perhaps it is no surprise with the October Fed decision upon us. Tomorrow, we will get more clarity from the Fed on the liftoff timeline. If we break it down based on recent guidance, it appears to me, the probability for a rate rise in December should be a lot higher than the 35% chance the market is currently pricing. While it is true we got some soft data in early October, highlighted by the dreadful monthly employment report, we have since seen a pickup in data that has also produced higher than forecast CPI. This in conjunction with the fact that emerging markets have stabilized and stocks are back to within a stone's throw of record high levels, should leave little excuse for the Fed to hold off from a tiny 25bp move.

CHIKEN, EGG  - So where can that critical inflection point be seen? Well, if you look at the price action in USDJPY and the SPX500 it becomes clear. USDJPY has rallied all the way back just shy of that major recovery high from August at 121.75, while the SPX500 is now testing the 78.6% fib retrace off the record high in May-August low move. Both of these levels are a big deal and if they are broken to the topside, it could pave the way for a resumption of the USDJPY uptrend and retest of the record highs in stocks. To me, it would make more sense that we stall out around here and both of these markets start to trade lower again. The funny thing is, the Fed might be looking at risk correlated assets and feeling good about the price action and moving forward with a hike, while these risk assets have been entirely supported on the basis that the Fed and other central banks have retained ultra accommodative policy.

Fed can raise because EM stable, but EM only stable because Fed holding off. Via @joelkruger

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