It’s official. Barring a flash crash or a terrorist attack, we’ve seen the most spectacular fireworks show we’re going to see on Tuesday and it came from a the fire-breathing dragon that is Sen. Elizabeth Warren.
This is a politician that makes Bernie Sanders look meek when it comes to lambasting Wall Street and boy, oh boy did she deliver today. In a tongue lashing that will probably go down in Beltway history, Warren blasted Wells Fargo CEO John Stumpf. Here’s the best quote:
“You should resign, you should give back the money you made while this scam was going on, and you should be criminally investigated by the Department of Justice and the Securities and Exchange Commission.”
She is of course referring to the “cross selling” scandal involving the creation of so-called “phantom accounts.” We won’t get too far into the details, but here it is in a nutshell from FT:
“Over the past week, details have emerged of a grubby practice that saw as many as 2m phantom accounts and credit cards being created for clients without their knowledge. And the purpose was clear: to inflate sales numbers, hit targets and boost bonuses. More than 5,000 staff have lost their jobs over the affair. Wells has been fined $185m and billions of dollars was wiped off its market value, demoting it from its rank as the world’s most valuable lender.”
Other than that there’s not much to see, which is to be expected ahead of tomorrow’s Fed decision. The market, of course, expects nothing. Or rather, a “hawkish hold,” which would entail no hike but a nod towards optionality. In other words, more of the same; some kind of sort-of dovish statement and then a mildly hawkish Yellen presser.
But as Bloomberg noted earlier today, at least two banks are tilting at windmills, to use a literary reference. Here’s Bloomberg:
“There’s uncommon dissent in the ranks of the Federal Reserve’s primary dealers over the central bank’s interest-rate decision this week.”
“Two of the Fed’s 23 preferred bond-trading partners -- Barclays Plc and BNP Paribas SA -- are betting against their peers and the bond market by forecasting officials will raise rates Wednesday. It’s the first time more than one dealer has gone against the consensus during the week of a policy meeting since last September, data compiled by Bloomberg show. Economists at both banks say traders have too steeply discounted officials’ intent to hike after the Fed has remained on hold for longer than expected.”
(Chart: Bloomberg)
Here’s the commentary from BNP:
“Yellen is likely to get a unanimous decision on a rate increase through a ‘dovish’ compromise that could involve ‘calming words,’ a drop in terminal fed funds rate and suggestion of no further hike this year. Decision will be a close call. Lower long-run dot and indications of no more hikes this year could soften the blow. A surprise Fed move could cause financial mkts to wobble initially, yet we doubt they would remain unsettled for long, as long as there’s a simultaneous indication of a pause until next March and lower long-term rates.”
Ok then, so what exactly does “wobble” mean? Well, TD thinks it would mean the 10Y at 177:
“Hawkish tilt might cause 5bp increase if Fed views risks closer to balanced (10% probability), or a 10bp increase if Fed raises rates, suggests limited expectation for a 2nd hike this year (15% probability)”
So let’s put that in perspective. A 10bps increase would look like this:
So that would represent a 40+bps move off the July lows. That doesn’t come without consequences.
Here’s what Barclays had to say two days ago:
“No, we’re not crazy. At least we don’t think we are. We believe the outlook, on balance, has evolved in a manner that clears the committee’s stated threshold for action. Since mid-year, employment growth rebounded, with the three-month moving average in payroll employment rising to 232k through August (Figure 2), modestly above the average monthly gain since employment growth turned positive in 2010. How does the committee view the rebound in hiring? The minutes to the July FOMC meeting state that the June labor data were sufficient to confirm ‘‘participants’ earlier assessments that the small gain in payroll employment in May likely had substantially underestimated its underlying pace.’’ If the initial rebound in June hiring was enough to improve committee member’s confidence, the July employment data only solidified this view, leading the Chair to describe labor market performance as ‘‘solid’’ in her remarks at Jackson Hole. While many investors and analysts saw the moderation in the pace of job to 151k in August as disappointing, we do not believe the committee needs another above-average month of hiring to conclude labor markets were healthy. Furthermore, most FOMC participants expect, if not desire, employment growth to slow as the economy reaches full employment and see job growth of 150k per month as consistent with further improvement in labor market conditions. While a stronger August payroll report may have made a decision to remove accommodation more obvious, we see the August employment data as meeting the Fed’s needs at this stage.”
(Charts: Barclays)
We’ll see who is and isn’t crazy tomorrow at 2 ET.