Rate Hike Has Mixed Reactions

So the Fed raised the discount rate, and in a cryptic way they seemed to get by without much damage.  Did they really foretell such a move, and if so why put this out there on a Thursday after the close prior to expiration?  It seemed destined to doom some SPX futures traders as even though volatility was low the Fed was stirring the pot.  In case you weren't aware, options on futures expire with the opening print on expiration Friday, thus the last trade of the day Thursday is IT.  Oh sure, if you were long contracts or short puts you could have bought the next month out, but that was of no consequence, perhaps your maintenance did not allow it.  And then the open of the market, the futures were down only a small fraction, as the indicated low VIX had predicted.   If you sold in a panic Thursday night you were spoofed.   The wild gyrations aftermarket were suddenly vaporized and a tight trading range would ensue.  Odd how dire predicaments turn out to be little fires.

Futures Market Not Buying a 'one off' Move

I look at another futures market when considering Fed moves:  the Fed Funds Futures (FFF,chart below).  These are like bonds and the price moves higher when fed rate yields move down. You can see prices went DOWN, so FFF yields went UP, anticipating future rate hikes (earliest move now in Oct, yesterday it was predicting Mar 2011).  Its a predictor of what the Fed may do into the future.  The front months get most of the volume and notice, naturally because so many events into the future make for inelastic moves.  The FFF got a jolt on Friday because of the discount move.  Now, it seemed as if the Fed was going out of its way to make it clear this was a maintenance issue, NOT a true tightening.  Many were out there defending the position of accomodation, easy credit, etc.  Well, I've always come to believe that the market always gets it right, and while the Fed has every reason NOT to tighten rates (there are many), it is action not words that speak the loudest.  To be sure, these times are different, and policy should be more flexible and transparent.  But judging from history the Fed rarely times it right and will much rather get in front of a move if they believe inflation fears are rising.  That may not be the case here, but nevertheless policy moves are generally not 'one and done'.  Expect more on the tightening regardless of what is 'said'.

 

VIX is Bringing Another Kind of Fear

The VIX hs been predicting more comfort and less fear for quite some time.  It seems the days of heavy panic selling and VIX readings in the 50, 60, 80 range are behind us now, right?  Well, we never say never, but the market is quite sanguine right now about issues, and that is a concern.  Without much volatility in this market prices are drifting into another stratosphere.  Oh sure the latest correction of nearly 10% was due and not unexpected, yet we didn't quite see an elongated fear that really shakes up the markets.  What will bring the fear back?  Apparently the news is not doing much to 'shake' anyone, and certainly the rate hike was met with more buying.  That undeniable story of panic is still out there, the market will tell us how/when the reaction is taken.