Friday, February 19, 2010

Foreseeable Future Of Narcissists Ended Yester-night

Federal Reserve raised the discount rate yesterday night. Note that discount rate is charged to banks for direct loans by the Fed, and it is not the policy "Fed Funds" rate. WSJ Real Time Economics has a list of opinions on the move.

Interestingly, Bruce Kasman at JPMorgan opines:
This move is part of the removal of unconventional measures and should not be seen as a signal of a change in the Fed’s monetary policy stance.
That rather sounds like talking the "sweet spot" and "reflation trade"... However, Macro Man has it right, IMHO:
So while the Fed and much of the sell side are claiming that the discount rate hike "don't mean a thing", given current market pricing Macro Man ain't biting.
There is quite obvious risk of inflation scare in the markets (that would be wrong, IMHO), mainly due to base effects. Societe Generale, among the members of the hawkish wing commented:

The Fed is moving faster than anticipated and the pace suggests that we should anticipate outright rate hikes in the second half of 2010 rather than early 2011 as we previously expected.

The next likely step will be dropping the “extended” language from the FOMC statement. It is now a very likely outcome at the next Fed meeting on March 16. Whereas we thought that such an outcome was conditional on employment increases, the hurdle on that now looks much lower. Unless the employment situation deteriorates, the Fed is set to move forward with its accelerated exit plan.

Singaporean DBS got it even more hawkish:

Markets currently have one 25bps hike priced in Q3 and another Q4. DBS has been modestly more aggressive in its view than markets for some time. We continue to look for two hikes in Q3 and another two in Q4, putting Fed funds at between 1% and 1.25% by end-10. (The fed funds target midpoint is currently 0.125%). We view yesterday’s discount rate hike as confirmation that we are on the right track.
Global equity strategy team at BofA Merrill Lynch have it really sweet in their backyard:
Rising rates are a bull market phenomenon. Confirmation of this view requires a positive reaction from bank stocks and the yield curve staying steep.

MSCI ACWI target remains 350. Three quiet positives which boost our bullish cyclical view for global equities: US consumer data improving; there has been no deflationary shock for equities from Greece (inflation expectations are surprisingly elevated); bank performance yet to respond to steep yield curve ...

The next secular bull market in equities will coincide with a secular bear market in government bonds ...
As to me, the foreseeable future of narcissists ended yester-night, with global liquidity getting tighter and uncertainty increasing ...

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