Later today, the Fed will be announcing the minutes of their latest monthly deliberations and the markets are all agog. Will they or won't they? The future of all mankind hangs on what they intend to do with their Fed Funds interest rate target (or so the mediawould have you believe).
Yes, preposterous as it is, many pundits are worried sick, fearing trouble in the stockmarkets if the Fed announces a rise of wait for it 0.25%. For those born before the year 2000, a move of this minuscule amount will seem no more than a blip and of no measurable consequence on whether anyone will decide against taking a loan in the real economy.
But I have news for those pundits: the market has already decided it for them.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Here is the latest chart of the interest rate on three-month US Treasury T-bills:
The floor has been 0.0100% and in the past two weeks, the rate has shot up to 0.0500% a massive increase of 500%! That is a solid vote for higher short-term interest rates.
So anyone paying attention to the real world of open market honest price-discovery (rather than the fairyland of Fed manipulated rates) can now rest easy and spare us their convoluted articles. They have their answer.
But what is curious to me is the behaviour of the long-dated 30-year T-bonds. The yield on these is also determined from honest, open market price-discovery and this is the chart:
Remember, the price of the bond moves inversely to the yield. So when the price shot up from mid-July, the yield was falling. But at the same time, the T-bill yield was rising. That is an unusual event. The yield spread was thus in decline the yield curve was getting flatter. And that was a stark reminder that the economy is in a deflationary phase.
When long-term rates decline, investors are willing to pay up for the bonds as their inflation expectations are weakening. They judge that they do not need so much yield to compensate for future inflation. The market is saying that it does not expect to see an increase in inflation; rather, dis-inflation and even deflation.
Incidentally, the 30-year Treasury is one of my all-time favourite trading markets to swing trade. At mid-month, sentiment had reached an extreme in bearishness (most pundits expected the Fed to raise rates which 'should' knock the bonds). But I spotted an opportunity and went long against conventional wisdom. Now, the market has moved up in a C wave to where the C wave equals the A wave in height and provided a good place to take partial profits of around 550 pips.
Another trading opportunity on the other side of the world
The rally off the wave 1 low is an A-B-C affair (green lines), which is typical of second waves. Now the market is embarking on a third wave down, which promises to be long and strong. When the market breaks below the 200-day moving average (MA red line), the selling will become intense.
That Chinese bubble has now burst. And faith in the authorities to keep the bubble inflated will evaporate as the market works lower. They will come to realise that no matter how much 'support' the authorities offer, it will do no good if the will to invest/gamble isn't there. It is called pushing on a string.
The power of fear trumps everything else. Many investors/gamblers will be ruined and who knows the consequences for social order in China.
On the eve of the Fed announcement, markets are braced but I expect them to become very lively as the news filters out. We often see very wide swings both up and down immediately after a widely-anticipated news release and I have no reason to expect otherwise today.
-
Side hustle tax changes: HMRC reforms could save thousands from filing self-assessment tax returnsThe government plans to raise the tax-free threshold for trading income – here is how it could help your side hustle
-
Return to the office: is working from home coming to an end?More and more employers want their staff to return to the office. Is it a good idea?
-
Gold’s rally should continueFeatures Matthew Partridge looks at where the gold price is heading next, and what that means for your online trading.
-
Prudent trades in PrudentialFeatures John C Burford shows how his trading methods can be used for more than just indices and currencies. They work for large-cap shares too.
-
Will our skies be filled with helicopters?Features Inflation expectations are rising. John C Burford looks at how that will affect the stockmarkets.
-
Did you find the path of least resistance in EUR/USD?Features John C Burford outlines a trade in the euro vs the dollar in the wake of the US Federal Reserve’s most recent announcement.
-
How to find the path of least resistance for EUR/USDFeatures A belief that "news makes the markets" would have lost you a lot of money betting against the euro, says John C Burford. Here's what to watch instead.
-
The pound hit my 1.45 target – and then someFeatures John C Burford said the pound would get interesting. But as it turned out, even that was an understatement.
-
Bad news isn’t good news for stocks anymoreFeatures Last year, the mantra was “bad news is good for stocks”. Now, it looks like traders have finally switched their thinking around, says John C Burford.
-
Is a central bank cartel at work in the markets?Features John C Burford examines the euro chart, and asks whether there is a central bank conspiracy at play.
