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The Next Fed Rate Decision – 16 December 2015 – Rate Rise?

I. Don't be overly surprised by a Fed rate rise at the next FOMC meeting on Wednesday, December 16, 2015

  • Although off cycle announcements are a remote possibility, this is a Fed that wants to avoid surprises
  • Even though several economic indicators are worse now than they were in 2012 - when QE was purchasing $85B a month - Fed Chairman Janet Yellen is strongly signaling the "live possibility" of a rate rise
  • The Fed fears that they risk becoming irrelevant if they continue to do nothing

II. Everyone is prepping for a rate rise, and by everyone, I mean stocks, currencies, and bonds

  • STOCKS: The recovery in U.S. stock indices from August and September lows seem to be signal that equities can stomach a rate rise
  • CURRENCIES: The once again strengthening U.S. dollar signals that the currency markets expect a Fed rate hike
  • BONDS: Bonds already seem to be pricing in a rate rise, but could be volatile directly ahead of announcement

U.S. Treasury Yield Curve Graphs for 11/6/15, 10/6/15 and 9/4/15

o Since 9/4/15, 2-year yield is up +18 basis points (bps), 10-yr +20 bps, and 30-yr +20 bps [see table at bottom]

o Since 10/6/15, 2-year yield is up +28 bps, 10-yr +32 bps, and 30-yr +22 bps [see table at bottom]

III. Look left, look right, look left again

  • The Fed will examine plenty of data to keep the market guessing - retail sales, Empire manufacturing, industrial production, CPI, housing starts, and jobless claims - but today's strong employment numbers and tick down in unemployment moves them closer to a hike (right or wrong)
  • Even though - U.S. wage growth remains questionable, labor force participation is weak, low wage part-time employment is high, business manager polls are tepid, U.S. is growth anemic, global growth is sluggish, low GDP growth in China continues to lead emerging markets and commodities lower, Europe and Japan continue to stagger on central bank largesse, and inflation is non-existent - Yellen seems to indicate that doing something is better than doing nothing

IV. If the Fed does not raise rates:

  • Expect a stock rally similar to last September as well as some large selling into that rally, because 1) Not raising rates doesn't change anything, and 2) The exact same question will reoccur in 2016
  • Expect the US dollar to drop sharply intra-day
  • Expect Treasury prices to rally and yields to drop

V. Appendix

U.S. Treasury Yield Curve Table for 11/6/15, 10/6/15 and 9/4/15

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.