Markets are cheered by the Fed’s moderately brighter outlook (and bonds worried). This is why closing the pattern ahead is not so much about economic models, but understanding crowd psychology; this is what explains our success.
We have known for months that observers, including those at the Fed, would miss US relative vigor just ahead. But the market crowd, whether groups of individuals here and there, or the entire lot, cannot act without an authority figure granting it approval. It needs a god and in most cases, this is the Fed. Once the Fed puts it stamp of approval on what before amounts to a hunch, the market crowd is free to tear off. That is what we have just witnessed.
With this in mind, we advised clients on Feb/16 to look to own the Euro strip, using 9/12 – 9/13 as an illustration, then -13, target -25. Last, -25.
Next, in our Mar/9 sketch we reminded clients that the course-of-least-resistance for the term structure would remain wider, and under no circumstance to set a trade looking for the reverse. In that sketch we recommended clients own both 5-10, and 2-30, printing 114 and 285 after that day’s NFP release. Last 115 and 298.
Finally, know that the Fed’s forecasting track record is poor. Fine, they are only human (despite what some of them maintain). Here the Fed has come to understand what we understood much earlier. But that can change, and quickly. We simply have to be there first.
Robert Craven
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