The FOMC Meeting And What Low Rates Really Mean

The Fed can’t keep rates low forever and there is talk that they may raise rates faster than anyone has believed up to now.

The order filler went on to say that most traders in the Eurodollar futures and options don’t think the Fed will raise rates anytime soon but did say he expects to see some type of movement at the end of 2015.Last Friday I had a chance to sit down with a Eurodollar options order filler to get his point of view on rates. I also asked him how it was going in the pits and he said that there was a big pickup in volume last year when there was talk that the Fed might start to move short-term rates higher. Almost a year later nothing has changed.

7 Years Later

Interest rates have always been a big part of the futures markets but over the last 7 years both the options and futures volume have fallen off a cliff.

What used to be the one of the biggest volume pits on the floor has been hurt by the Fed’s zero-rate policy. Long before the CME bought the Board of Trade the bond pit had already gone from 600 in the pit down to 20. The Eurodollar futures and options that used to have over 2,500 people is down to 150 to 200. As the volume disappeared so did the traders.

Free Money

Cheap rates has been the main driver of the stock market. With little or no return on interest rate products the public has had no place to go but stocks. This has worked well for those that stuck with the buy and hold but those who waited for a correction have been left on the sidelines.

With no 10% correction in almost 3 years and the S&P trading above 1900 and the Dow nearing 17000, many are wondering if this is just a runaway train or a real sign of confidence in the economy. The answer is, it’s some of both.

There are good reasons for optimism: 9 million new jobs created, a return to the pre-crisis unemployment rate, 7.5 million newly enrolled in health insurance plans, an end to the $10 billion a month war in Iraq. But with inequality worse than that of the Great Depression, the middle class is wondering just who this recovery is really helping.

This lack of trust goes to the heart of what credit means and does for an economy; it’s an expression of our faith in ourselves and each other. The Fed is keeping rates low in hopes that banks will start investing in entrepreneurs, in infrastructure, in things that make societies grow.

If the massive stockpiles of cash that companies have raised in this stock boom, combined with cheap credit, can be invested in the things that will make a bright and secure future for everyone, not just a few, the Fed’s strategy will have turned the financial crisis into a great opportunity.

The Asian markets closed mostly higher and in Europe 8 of 12 markets are trading modestly higher. This week’s economic schedule starts with the first day of the FOMC two-day meeting, Consumer Price Index, Housing Starts, Redbook and earnings from Bob Evans Farms (NASDAQ: BOBE), Adobe Systems (NASDAQ: ADBE), Yingli Green Energy YGE and La-Z-Boy LZB.

Our View: Mutual Fund Monday’s return has not been kind to Turnaround Tuesday, which used to be the most winning day of the week. Turnaround Tuesday has closed higher 4 out of the last 6 weeks.

While we maintain a bullish bias we also know you have to be on guard for the headline algos, which take the media hype you see in “Breaking News: Crisis in Iraq” graphics and turn it into short sales based on how fast the words “Iraq” and “crisis” start trending on Google and Twitter.

Our view is to sell the early rally and buy weakness, if the ESU14 can get back above 1933-1934 we think it could trade up to 1938-1940.

As always, please make sure to use protective stops when trading futures…

• In Asia, 7 of 11 markets closed higher : Shanghai Comp. -0.92% , Hang Seng -0.42%, Nikkei +0.29%.
• In Europe, 8 of 12 markets are trading higher : DAX +0.15% , FTSE +0.04 %
• Morning headline: “S&P 500 Index Seen Higher Ahead If Housing Data ”
• Fair Value: S&P -8.11, NASDAQ -8.00, Dow Jones -79.96
• Total volume: 6k ESU and 1.73k SPU traded
• Economic calendar: FOMC meeting begins, Consumer Price Index, Housing Starts, Redbook and earnings from Bob Evans Farms BOBE, Adobe Systems ADBE, Yingli Green Energy YGE and La-Z-Boy LZB.