Tags: Julius Baer | Mark Matthews | Fed | Janet Yellen

Julius Baer's Mark Matthews: Fed Realized It Made a 'Boo-Boo' Last Week

Julius Baer's Mark Matthews: Fed Realized It Made a 'Boo-Boo' Last Week

By    |   Friday, 25 September 2015 10:15 AM

For the second day in a row the Dow rallied to cut its losses below triple digits.

After the market closed, Janet Yellen, the infallible leader of the Federal Reserve, delivered a bizarre academic-style speech and took no questions.

The apparent purpose was to convince herself that the FOMC really will act before the end of the year to raise the Federal Funds Rate by a mere 25 basis points.

Perhaps the Curia at the Fed panicked at the realization that the Fed’s vaunted communications effort is creating more confusion than support for whatever the Fed is doing.

Clive McDonnell, Head of Equity Strategy at Standard Chartered, thinks Yellen’s remarks reflect majority opinion on the FOMC that the move should be made by December, and he expects this to happen but still says, “It’s not a done deal.”

He added that the issue now is “capital flight” from emerging markets (EM) to developed markets (DM).

This writer would note that perhaps some of the adverse market reaction is due to processing the fact that the Fed sees itself as the central banker for the world, but in the wake of the 2008 episode, this is hardly new information.

Mark Matthews, of Bank Julius Baer, also stressed Yellen’s alignment with the views of FOMC members who have called for action, and he theorized that “they realize they made a boo-boo.”

He suggested that the market has changed its view of rates and that there was a “tipping point” last January when the markets “accepted the Fed’s guidance that rates were going to go up.”

And by March, “they wanted it to happen,” so the Fed has “made a mistake” by not delivering.

Mitul Kotecha, of Barclays, has not changed his view that the Fed will not act until March 2016, and this is based on markets remaining weak and the ECB adding to its QE program in response.

Meanwhile, according to Steve Fisher of UBS, Caterpillar (CAT) may be acting as a proxy for the global weakness Kotecha and others are talking about, because of its commodity exposure.

Another Caterpillar detractor is Karen Finerman, who said, “They are in the worst place you could possibly be. I don’t see what’s going to make it turn around; it takes a long time.”

However, Bill Smead, of Smead Capital Management, thinks that low commodities prices are the result of the bursting of a “commodities bubble, and after it bursts, you lay on the floor for a while.”

Instructively, he expects the commodities bubble to be followed by a housing bubble.”

Ed Dempsey, of Pension Partners, asks where the growth is going to come from for a hike.

Yellen’s speech at the University of Massachusetts at Amherst (and Steve Liesman’s shorter rendition) could spur further debate over the Fed’s view of inflation.

As the Fast Money traders parsed Yellen’s speech, Guy Adami was not convinced by Yellen that the current state of prices is “transitory.”

He concluded, “She can say whatever she wants, but actions speak louder than words. They had an opportunity to raise last week; they didn’t do it. I think that was their window. The window’s closed.”

Dan Nathan said, “Nothing good is going to happen” between now and the end of the year to improve the environment for raising rates.

Finally, Nathan spotted a spike in volume for October 30 puts in the Financials (XLF).

Perhaps this indicates that earnings will be painful for banks, but maybe the buyer is just getting protection while retaining exposure to the group.

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Mark Matthews, head of research Asia at Bank Julius Baer, says the Fed is looking to move interest rates away from near-zero in October or December this year.
Julius Baer, Mark Matthews, Fed, Janet Yellen
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2015-15-25
Friday, 25 September 2015 10:15 AM
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