Fed Notes Reveal Rising Hawkish Sentiment, but Bonds Rally Anyway

From Tyler Durden: Although the Federal Reserve seems to be getting more and more hawkish with each passing meeting, the bond market is simply not pricing in any potential for a rate hike this year.

With Fed speakers attempting to jawbone the current narrative back from the uber-dovish record-high-creating Fed statement, all eyes today were glued on how hawkish the statement would be with regard 2016 hikes – few, some, or many? Since The Fed statement, GDP expectations have crashed to cycle lows but that has not seemed to stop The Fed:

  • FED OFFICIALS SPLIT IN JULY ON WHETHER RATE HIKE NEEDED SOON
  • A COUPLE FED OFFICIALS BACKED JULY RATE HIKE
  • FOMC VOTERS AGREED TO WAIT FOR MORE DATA TO GAUGE ECONOMY

But perhaps most notably, several Fed officials are concerned of financial risks from too low rates.

*  *  *

Pre-FOMC Minutes: Sept Odds 28%, Dec Odds 55%, S&P Futs 2173, 10Y 1.56%

Rate hike odds have risen again as the stock market rallied…

 

And since The fed meeting, stock-strength-driven rate-hike odds have mirrored the collapse of economic growth expectations…

 

But we note that despite a 14bps range, Treasury yields – across the entire complex – are practically unchanged from The Fed statement…

 

Some additional headlines from the minutes:

  • SEVERAL FED OFFICIALS CONCERNED OF FIN. RISKS FROM LOW RATES
  • SEVERAL FED OFFICIALS SAW AMPLE TIME TO ACT IF INFLATION RISES
  • SEVERAL FED OFFICIALS WANTED TO WAIT FOR MORE INFL. CONFIDENCE
  • FOMC VOTERS DIVIDED ON WHETHER JOB-GAIN PACE WORRISOME

And finally, Jim Bullard dropped this…

  • *BULLARD: CENTRAL BANKS GLOBALLY ARE RETHINKING MONETARY POLICY

All it took was 667 rate cuts and printing $10 trillion…? But we presume will keep doing the same stuff expecting a different result?

* * *

Here are the key sections breaking down the Fed’s intentions:

On the “prudent” to wait front:

Members generally agreed that, before taking an-other step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.

“Coupled” wanted more evidence for 2% inflation, but “Some” anticipated a sooner rate hike:

A couple of members preferred also to wait for more evidence that inflation would rise to 2 per-cent on a sustained basis.Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.

And the dissenter, Esther George:

One member preferred to raise the target range for the federal funds rate at the current meeting, citing the easing of financial conditions since the U.K. referendum, the return to trend economic growth, solid job growth, and inflation moving toward 2 percent.

A notable tangent on upcoming money market reform (rising Libor rates):

Although upcoming regulatory changes were expected to improve the stability of money market funds in the longer run,the staff noted the potential for large withdrawals by investors in anticipation of those changes to lead to some disruptions in the short run.

On asset valuations:

Vulnerabilities emanating from leverage in the nonfinancial private sector remained moderate: While business debt ratios stayed elevated, household debt-to-income ratios continued to inch down. Valuation pressures also remained at a moderate level. Although term premiums on Treasury securities became more deeply negative and CRE valuation pressures remained appreciable, corporate bond and equity risk premiums were unchanged on net.

On Brexit:

“Some noted that the Brexit vote had created uncertainty about the medium- to longer-run outlook for foreign economies that could af-fect economic and financial conditions in the United States. Participants generally agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.”

* * *

Another key observation: the Fed is starting to be concerned about tight lending conditions, because while the word SLOOS (aka Senior Loan Officer Opinion Survey on Bank Lending Practices) was mentioned precisely zero times in June, it saw a substantial 7 mentions in the July minutes.

Finally, the number of times “global” was mentioned in the minutes: 14x, one less than in June.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) rose $0.56 (+0.40%) to $138.95 in Wednesday afternoon trading. The TLT has gained 15% since the start of 2016.

TLT-2016-08-17

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