Konichiwa

Alright, well we made it. It’s Friday. Yellen spoke and we survived. The rally lives. Another few red points on the Dow and S&P and the Nasdaq’s marginally green.

This was pretty easy to see coming. The optionality is critical. This is another one of those situations where you have to wonder what the alternative was. What was she going to do? Say “we’re hiking in September, deal with it?”

Of course not. So we head into the weekend looking generally sharp:

Essentially, no one knows what’s going to happen. Here’s the desk commentary from Goldman:

“In a speech to the annual Jackson Hole symposium today, Fed Chair Yellen said that the “case for an increase in the Federal Funds rate has strengthened in recent months”. This comment follows remarks from other Fed officials over the last two weeks indicating that policymakers see an improved economic backdrop and reason to consider a rate increase over the near-term. Although neither Yellen’s comments nor those of other officials have been explicit on the precise timing, this may reflect message discipline ahead of the August employment report to be released next week. In our view, if the employment report continues to indicate an improving labor market, the FOMC may well raise rates at the September meeting. As a result, we have increased our subjective odds of a hike at next month’s meeting to 40% from 30% previously. We also now see a 40% chance of a rate increase at the December meeting, were the committee to remain on hold in September. Therefore, our cumulative odds for at least one increase this year are now 80%, up from 75%.”

Great. But remember, this all depends on what happens between now and the end of the year. We’ve seen record inflows into EM debt as investors expand the search for yield. It’s still not clear what happens if the Fed starts to unwind this.

Frankly, it’s ridiculous. There is no question as to what the consequences will be if the FOMC increases the policy divergence between the US and other developed markets. EM FX will crater as well as risk assets across the board, including crude.

They’re going to have to figure out a way to reconcile this with the ECB and the BoJ. That will require one of two things: 1) agree on a normalization regime, or 2) the US central bank joins the club and starts buying corporate debt and stocks. Do you need us to tell you which option is more likely?

What they’re going to do is hike to preserve the rate optionality and then subsequently start buying corporate bonds and then, stocks.

This is a creeping nationalization of the corporate bond market and the stock market.  That’s not a conspiracy theory, it’s a fact. And we suppose that’s fine, as long as the market doesn’t suddenly realize what this means.

Price discovery is now over folks. You’re hitting whatever bid they want you to hit. You’re Japanese. Konichiwa.