On wednesday 18th, the FOMC committee communicated two big shifts in its forward guidance regarding the interest rate path:
1. Lowering the Fed Funds Rate forecast for the end of 2015 (from 1,125% to 0,625%), thus signaling a slower hiking cycle. This was partially priced into Eurodollar market (which prices the odds of a Hike in September 2015 to less than 50%), but the weakness in equities since late February indicated otherwise. So there's a rational bid in there.
2. More importantly, the Fed also reduced its estimate of the "natural" rate of unemployment (the NAIRU, or non-accelerating-inflation rate of unemployment) to 5.0% from 5.5%. Part of the freakout of the past couple of weeks had a lot to do with a surprisingly solid payrolls report (+295k jobs and U-rate down to 5.5%). Another bid will come from a critical change in expectations: since the Fed is timing a hike with data dependence (specifically, when it sees a tight labor market and signs of wage and price acceleration), the new forecasts indicate a future that would be less tight than expected, until these variables show any signs of true overheating.
Technically, the furious & high rally right out of the minutes broke a major resistance line (200-MA in 1hr, 208.60s. We'll probably revisit this line for a quick tap tomorrow morning (fast money seems to be lightening up its outsized longs). I'll put limit orders near the same moving average, some wiggle room with the stop loss (I won't be stop hunted this time), and just ride the rally that's coming in the US Equities Market... A clean crossing off the Hagopian Line (around 210.50s at the current point of the slope) will confirm the strength of the rally.
Possible headwinds on the vision:
- US Debt Ceiling - related political shenanigans (Republicans own Senate & House of Reps)
- Crashing oil and more fallout in the HY Energy sector
- A continuation of poor macro data in the US
- Flash Crashes (the dollar was decimated by algos yesterday right at the market close.. it was temporary, yet scary)
Remember to do your homework before placing a trade, and good luck!