“Wait-And-See” Week Off To Aimless Start

Well, what can you say about Monday?

We shot a terrorist, subsequently captured him, and GM got a key upgrade (USA! USA!).

Other than that, it’s an aimless session. After a fast start, stocks drifted lower, then rebounded a bit, and then… you get the idea.

The problem, apparently, is oil. Have a look:

“They keep jawboning this market and the market keeps rewarding the comments for some reason,” John Kilduff, partner at Again Capital, a New York hedge fund focused on energy, told Bloomberg by phone.

Kilduff is referencing comments from Venezuela’s Nicolas Maduro who on Sunday said OPEC is “very close” to striking a deal to stabilize prices. Now if you know anything about Maduro, it’s unclear why anyone would take anything he says seriously, but the market does love a good dose of jawboning even if it comes from the most politically and economically discredited jaws of them all.

"This is a wait-and-see week," said Art Hogan, chief market strategist at Wunderlich Securities told CNBC.  "To follow through, you're going to need some clarity from the Fed and the BOJ. I think the lift-off we got was some capitulation on oil not going below $30 [last week]."

We’re not entirely sure if he was being facetious there, because if oil had slid to a $20-something handle last week, we’d be down 500 points on the Dow today. In other words, did he mean $40?

Whatever the case, crude gave up the gains at which point so too did stocks and it’s been a seesaw ever since.

Anyway, it is indeed a “wait-and-see” week. All that matters is what the BoJ and Fed do and what that ends up meaning (if anything) for yield curves (see here for more). For his part, Bloomberg’s Mark Cudmore (a former FX trader) thinks he’s got the FOMC all figured out. Here are some excerpts:

“The Fed won’t raise rates on Wednesday. Without regurgitating a multitude of previous columns on this issue, there’s absolutely no justification for a hike.”

“At the same time, we’ll get updated economic projections which are highly likely to show reduced growth and inflation expectations. So the official statement is set to be disappointing for the dollar at the margin even if it indicates support for the theoretical concept of raising rates.”

All this means that the initial reaction is likely to see U.S. yields and the dollar lower. Then we have the press conference where dollar bulls expect Yellen to hawkishly guide the market toward a hike later this year

“Based on recent rhetoric from other Fed officials, this isn’t an illogical assumption. And with a 2016 hike only 55% priced, there’s room for front-end yields to jump so this is the key bet for USD-bulls.”

“The problem is that Yellen doesn’t have a track record of being hawkish. The Fed also doesn’t have a history of clearly guiding for an exact meeting and is likely to want to give itself room to delay if recent poor economic data is just the start of a sharper growth slowdown.”

“In summary, while the press conference could be the moment of redemption for dollar bulls, it’s also ripe for disappointment.”

So the Fed announcement could be USD bearish or USD dollar bullish. Thanks for that. All that’s missing from that analysis is the contention that the presser could be dollar neutral.

But again, the big question here is the curve and what happens after this week and into year-end. Here’s Goldman’s take:

“We downgrade bonds to Underweight over 3 months, in line with our 12- month view. We forecast that UST 10-year yields will reach 2% entering 2017, or 25-30bp above the forwards until year-end. Our corresponding forecasts for German yields and JGBs are 0.3% and 0.1%, respectively – both above the forwards. We see three reasons why the recent bond sell-off will extend into year-end: (1) bond valuations are still stretched, (2) the influence of QE on the term premium is fading, with the ECB and BoJ putting QE programmes under review, and (3) potentially a bigger role for fiscal policy.”

Which means there’s still hope for more multiple expansion in stocks. Unless of course the increase in rates turns out to be not-so-gradual. In that case, just pray for risk parity:

(Chart: Goldman)