A neutral Fed, if that is what we have, is a unicorn - mythical, what next?

Outlook:

We called for a breakout and the Fed delivered. Again, ending QE should be named “normalization” more often to drive home the point that zero rates are weird and abnor-mal, and traders were not smart to think of them as the normal base case, so that any pending rise in their costs is a burden. It’s not a burden—it’s the cost of doing business. The equity crowd has no real basis for complaint—after all, a robustly growing economy is good for earnings, right?

The FT makes reference to two other points but without depth. The first is a comment by a big bank FX analyst (Citi) that the market has price in October 2015 for the first rate hike. Reuters reports expecta-tions moved up from Oct to Sept.

Really? What happened to “summer”? We also heard talk of the April or June meetings. The implication is that the Fed is ahead of the curve and the bond market is lagging behind. And yet it is the Fed’s goal to manage expectations. A related point is that the Fed declined to mention market stability, despite the spikes at mid-month in yields and equities. We can’t be sure, but there seems to be a disconnect between how the market saw the panic and how the Fed saw it. Maybe the Fed just doesn’t want to bring up the subject of not being responsible for identifying and dealing with bubbles. But Greenspan was clearer—he can’t do it, and won’t do it. But we would really like to know how the Fed feels about the effect of its policy decisions on markets overall. This harks back to managing expectations.

Goldilocks land, not too hot and not too cold, never last for long, if only because equilibrium gives trad-ers no chance to make any profits. A neutral Fed, if that is what we have, is a unicorn—mythical. It won’t be long before we start getting all kinds of wild ideas about what the Fed will do next, and when. Ending QE didn’t advance the cause much—it has been a long time coming. Now we need new inputs on what comes next. If we have to rely on data alone, we’re probably in trouble.

First up on the data front is GDP, expected at 3% or 3.1% (WSJ) in Q3 after -2.1% in Q1 and 4.6% in Q3. As always, a higher number feeds straight through to rate expectations and a weaker one to silly talk of QE4 again.

On Friday, we get eurozone inflation, with the early data from Germany (only 5 states) pointing to lower inflation but expectations for Germany as a whole to see a rise, if only to 0.9%. The eurozone forecast is for a rise to 0.4% from 0.3%. A small rise like that, if that is what we get, reduces the need for the ECB is singer ever-louder about QE measures, and could provide more support than would be really warrant-ed to the euro. And it goes without saying that a drop in inflation or the same 0.3% would be a euro-negative and revive talk of a triple-dip recession.

Also on Friday we get fresh estimates from the Bank of Japan. We continue to think the policy is going to remain unchanged without any regard for the data or the forecasts. The Abe government has decided on its course of action and will not waver. It would take a Shock to change that.

It’s not all over except the shouting. FX prices don’t move in straight lines and we have yet to get over whatever corrective upmove is coming, especially in the euro. We don’t not expect a massive gain (on higher inflation today, for example), but realistically, some kind of profit-taking bounce is only normal. We usually guess that a corrective bounce does not exceed the midpoint of the breakout bar, which on the daily chart lies at 1.2685. Knowing where a price will not go is useful only in options, of course.