The U.S. Fed Funds futures contract reversed its primary trend last month, potentially signaling the end of ultra-low U.S. interest-rates and the Keynsian policies that fostered them - see Figure 1.
Figure 1 Bearish Weekly Reversal in Fed Funds
Fed Fund futures have been in a pronounced uptrend since August of 2007 when they broke out of a 1-year sideways range between 94.77 (or 5.23%) and 94.75 (or 5.25%) one month before the Fed voted to raise the rate 1/2% to 4.75% or 95.25 in September of 2007. Since then the Fed has either been lowering short-term rates directly, or outright buying securities in the open market to keep long-term rates pinned lower. Just as markets told us of potential rate moves a month before they occurred in the summer of 2007, futures markets are again giving us a heads up of potential market turn; this time toward higher interest rates. The current Fed Fund futures front month contract is trading at 99.85 producing a yield of just 0.15%. The futures put in a high of 99.945 (or 0.055%) in September of 2011 following the U.S. congress and executive branch's failure to come up with a budget agreement.
As might be expected a lot of positive economic developments are accompanying the current shift. Generally interest-rates rise on positive economic news, and fall when the business outlook is uncertain, or slowing. The Federal Reserve just reported a profit of $77 billion from 2011, after a profit of nearly $82 billion in 2010, which tells us they successfully sold off the holdings they had accumulated during the market panic of 2008-2009. The Fed started buying both private and public sector securities in 2009 and 2010 in what became known as "quantitative easing" or QE I and QE II, in an effort to provide liquidity to the marketplace and force interest rates lower to support both corporate debt and equity markets. Judging from U.S. stock market performance and the household wealth stock prices so strongly influence, the Feds move to date have been successful. Job growth, which the Fed is mandated to foster, has also benefited. The monthly non-farm payroll number, arguably the most widely followed economic release for traders and economists, came in at or above 200K three months in row for the first time in over 4 years.
Financial markets are showing potential tectonic shifts as well with the S&P 500 posting a new 3-1/2 year high earlier this week to leave it trading at the same levels it did in the winter of 2007. Some analysts are calling the stock markets previous 12-year performance a sideways range with price holding a trajectory to test the high of that range, i.e. the all-time highs. And in the currency markets USDJPY is showing a quarterly reversal candle, after having spent 6-months in a sideways, accumulation phase following a 5-year bear market - see Figure 2.
Figure 2 Bullish Quarterly Reversal in USDJPY
And the oldest currency, gold, is showing an 8-month pattern of lower highs, while silver is showing a 1-year pattern of lower highs. If the current interest-rate shift holds it may make for a lower volatility going forward for all markets. In fact we are already seeing that now in U.S. stocks. In the S&P 500 chart in Figure 3 we've included a 14-bar Average True Range (ATR) beneath the chart, which gives us a running average of the height of the individual candles.
Figure 3 Falling Volatility in S&P 500
A falling ATR indicates smaller ranges, i.e. shrinking volatility, which is what we are currently seeing. If the term "normalized" was ever appropriate to describe an economic environment, the ATR is telling us we may just be in it now.
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