The Zigmont Report (Daily Market Recap for 9/20/17)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.


The opinions expressed below are my own

Fed day!  Usually an announcement of Fed policy, results in some volatility.  Not today.

When the Fed announces a *change* in Fed policy, usually the market really moves around.  Not today.

To be fair, the Fed didn’t surprise the market *with respect to balance sheet reduction.*  They surprised on their rate forecasts and their willingness to alter the balance sheet plan.

With respect to the balance sheet reduction, here’s what the Fed said they would do:

  • The Fed is going to run off $10 billion per month starting in October

o   $6 billion of Treasury principal/$4 billion of Mortgage-backed principal
o   this is very small and intends to not ruffle any of the market’s feathers.

  • The size will climb to $50 billion per month eventually

o   $30 billion Treasury/$20 billion Mortgage mix

  • Size will increase every 3 months until it gets to $50

o   5 quarters to get to the max

So this is very gentle balance sheet reduction.  They don’t want to shake up markets and this certainly won’t.  It makes sense that this part of the Fed decision wouldn’t move the tape much.

With respect to rate changes and altering things as we go,

here’s what they said:

  • Rates were left unchanged today

o   As widely expected

  • A rate change in December is still on the table

o   This is a surprise
o   Fed still sees inflation on horizon and thinks recent low inflation was due to transitory pressures
o   Expectations and trends were for no rate hike in December.  Market has been shrinking the Dec hike probabilities for weeks.  Market probability jumped to 63% today.

  • Rates are going to be the tool for monetary policy not the balance sheet

o   This is pretty surprising
o   Balance sheet runoff is going to happen essentially no matter what.  Only a “material deterioration” in economic conditions might cause Fed officials to consider resuming reinvestments.

  • Essentially the Fed wants balance sheet manipulation to be only for emergencies.  The path to unwind is very slow and gentle but also looks almost set in stone.

It looks a bit hawkish.  The Fed wants to get normalization going but also keep it going.  Even on the rate-hiking front, they don’t want to derail their plan.  This is in contrast to market expectations.

The easy-money party continues but it is winding down and the Fed is pretty dedicated to eventually ending it at the pace they outlined last year: three hikes a year.

The market is at the same level as yesterday.

Is the interest rate environment the same as yesterday?

What do equity markets see?

See you tomorrow,
-Mike