Stocks Tank, Lose Gains, Go Negative After Fed Stands Pat

The market was clearly disappointed that the Fed didn't announce something more aggressive.

Citi Statement on USD Impact of Today's Bernanke Presser

 Shout out to Zero Hedge for this:

Statement by Citi:
Today's FOMC meeting breaks new ground with the formal FOMC policy decision and statement at 12:30 followed by the Bernanke press conference at 14:15. Our economists expect that the Fed: "will complete the purchases of Treasury securities by the end of June … trim growth forecasts and raise projected inflation estimates slightly. …. a key goal of the Chairman may be to reassure the public that rising energy and commodity prices will not prove the leading edge of a persistent surge in inflation. …the Committee is not expected to alter its rate guidance or tinker with reinvestment of MBS principal repayments."
There is expected to be no enthusiasm for QE3 and no commitment on what will be done with maturing securities. This is pretty much what is priced into the market.
The somewhat more elaborate FOMC statement (vis-à-vis say the ECB policy rate announcement) and the 1 3/4 hour gap between statement and press conference may lead to somewhat more active FX price action in the interim. However, as investors have discovered with the ECB press conference, the answer to many questions may be "I have nothing to add beyond what I have already said" so those who expect a catharsis may be disappointed.
The potential USD negative surprise:
1) focus on the disappointing performance of the US economy, the downward pressure on real wages and weak levels of core inflation
2) reiteration of the view that global imbalances and inflation reflect misguided currency policies in EM
3) opening a door to QE3 if the outlook disappoints further
The potential for USD positive surprises:
1) a hard line on the fiscal situation and strong commitment to opposing any further monetization of the debt
2) any substantive concern that  commodity price increases may persist  and lead to second round inflation
3) concern on upward drift in long-term inflation expectations
4) any hint that the Fed is beginning to focus on tightening as the most likely next significant policy move
5) repetition of Treasury Secretary Geithner's strong dollar declaration (although as with the Treasury Secretary's declaration, the impact is likely to be limited at this stage).
Our CitiFX PAIN reading for EUR positioning is now at 65.82, pointing to the longest EUR positioning since early December 2010. US 2-yr yields are close to the bottom of the February-April range so it is hard to argue that investors expect anything but a somewhat dovish approach. Nevertheless, unless there is a real signal that some turn in policy is approaching, any USD buying is likely to be temporary.

Fed Keeps Pumping!

That about sums it up, thanks to Tyler Durden at Zero Hedge!

Bond Vigilantes Take On the Fed

The bond vigilantes challenged the Fed to a dual today, selling off 10-year and 30-year bond futures in defiance of the FOMC's statement yesterday suggesting that they would buy long-term treasuries. This was a great trade!

The FOMC attempted to use a verbal intervention to force interest rates lower, but it didn't work! The bond vigilantes would have none of it, and they didn't take the challenge lying down. They sold treasuries forcefully today in an open challenge to the Fed to do so. The 5-year note auction showed weaker-than-expected bids, and the sale was on in earnest.

With the U.S. government borrowing money in unprecedented quantities, bond holders world-wide are beginning to demand higher interest rates in order to hold debt that is more and more likely to be labeled with down-graded debt ratings and a higher probability of default. They want to be compensated for the increased risk!

On the blog of another financial blogger who is a bond specialist, he said that, "Investors are punishing profligate taxpayers for prodigious spending." Well said. His blog is located here:

Across the Curve

Fed FOMC Minutes Somewhat Dire

The Fed has indicated in its last FOMC minutes that even if economic activity turns negative, inflation fears may keep the Fed from cutting rates any more. Wow! Stocks are selling off as a result! Interestingly, interest rates are dropping on treasury futures!

Wheat Moves Lower From Resistance

As I had suggested a few days ago, the Upper Bollinger Band has provided dynamic resistance against higher prices for wheat, and it is moving lower for the second day. Since Bollinger Bands are based upon the concept of statistical deviation from a mean, it stands to reason that market forces were feeling that wheat was reaching prices that were too high, especially after reaching lock limit levels two days in a row. Bollinger Bands also represent one form of dynamic support and resistance, as do Exponential Moving Averages, Parabolic SAR, and others. At these dynamic levels, prices meet support and resistance, and therefore have a tendency to reverse. I avoid taking new positions as prices approach these markers.

Bloomberg this morning said that wheat traders thought prices were somewhat overbought from a rapid rise late last week, and have been liquidating, taking profits, and/or selling short as a result. Note here the daily chart (top chart, above), showing the resistance at the upper Bollinger Band, and the short-term charts (lower chart) showing today's sell-off in wheat.

In contrast, it is also noteworthy that in this daily chart (the upper one in this post), a series of higher lows and higher highs is evident (the light blue trend lines), so the beginnings of a new bull market in wheat may be emerging. It is still weak, but certainly worth watching.

A weaker US Dollar resulting from continued Fed rate cuts could perhaps be enough to increase international demand, create a break-out, and push wheat prices into a new, stronger uptrend. This could happen as soon as tomorrow, if the Fed continues its recent policy of aggressive interest rate cuts at the FOMC meeting this afternoon. However, since the grain markets close at the same hour as the Fed announcement, the impact on wheat prices won't impact the market until evening trading tonight. If it does affect wheat prices, no doubt that other grains and agricultural commodities prices will also experience renewed vigor.