Inflation has been soaring most of this year... With PPI nearing double digit levels of 9.6% and the CPI 6.8%, is it time for the Fed to get real about recognizing inflation?... Yes it is and they will do that today, the question is to what extent... They will accelerate tapering... They will increase their dot plots showing rate increases for 2022... But will they start discussions about policy sequencing? Meaning balance sheet reduction... The answer is probably not yet... Maybe a few meetings away.... We will repeat our scenarios from Monday as to what we see the odds of the Fed doing... Will they be aggressive? We think they are leaning in that direction... But with Omicron infections soaring, how fast is the Fed going to move... It took most of this year to get the Fed to finally back off from the word transitory, but we wonder how much of a move or signal they are willing to make... If they try to lean to the idea that inflation will resolve itself over time, then they risk losing more credibility... Here are the scenarios updated

Scenario 1... HAWKISH Move by the Fed..50%.. Here we expect the current tapering to double from 15 billion a month to 30 billion... That would be a reduction of 20 billion a month in treasuries and 10 billion of mortgages... The Fed dot plots, which indicate rate rises, will move from 1 to 3 for 2022... The yield curve will flatten as the front end, which is currently building in 1-2 rate rises, will adjust... 2 years will hit .90, on the way to what we think will eventually be 1.31.. 5 years will break 1.34 on the way to 1.60...given the expected flattening and a potential build in of a mistake of aggressive rate rises, we have not certain how much the back end of the yield curve moves...

Scenario 2 MODERATE. 35%. Here the Fed increases tapering by 50% from 15 billion to 22.5 billion... Treasuries tapering is increased from 10 billion a month to 15 billion... Mortgages from 5 to 7.5 billion... Dot plots show a move from 1 to 2 rate increases... Rates rally modestly as more is currently built in... 2 years move to .90-1% but not much more... The long end does ok and continues the range of 10 years from 1.70 high yield to 1.35 low yield... Equities would rally.

Scenario 3...DOVISH..15%. Here the Fed leaves tapering alone. 15 billion a month currently... And dot plots still 1-2 for next year... While markets may rally initially, the Fed would lose their credibility on fighting inflation... The curve would steepen with the long end doing worse... Equity markets would rally initially and then reverse... Those that are already blasting the Fed weekly, like El-Arian and Summers, would go ballistic... Those like Minerd of Guggenheim, who is already calling for a recession in 2022, would be praising the Fed... No way there is a recession in 2022.

Markets are quiet this morning biding time for the Fed announcement at 2 PM... We will be doing a hit with TD Wealth on Youtube at 9.15, but our 3PM hit was canceled... We see little moves this morning with 10 years just starting to break out of its 2 basis point overnight range... Volumes are about 60% or normal... Historically one should fade the trade movement after the presser and wait for the big trend to develop tomorrow morning , London time... But this is the most consequential Fed meeting this year...

Rates... Our view is that positions are pretty much hedged...but if the Fed gets serious as to where long rates are going, we could finally see our 1.75/1.85 before year end... If not the recent ranges should hold... Resistance at 1.35 and then at 1.22%... Back ups will first find support at 1.52/1.60 and 1.70... We had a long argument with a DC insider who still thinks that 1.85-2% is in the cards before year end... We do not see it... A big move like that would crater the stock market and reverse a big move like that... 2 years should break .70 on the way to .90... With an eventuality of 1.31... 5 years have support at 1.34 and then close to 1.50...

Equities... We saw a trade go through yesterday where one big "punter" paid 65 million and bought roughly 20,000 call options tied to the S+P that expire at the end of next week... We may have been early in our year end call for equities but many leveraged stock traders and volatility sensitive investors have derisked and a lot of retail equity buyers have been sellers since Black Friday. However, many more bearish threats have been discounted and there is plenty of buying power on the sidelines going forward...

Buckle up... It is going to be a volatile next few days...

Engine10 said:

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Where does Amazon fit into this puzzle?

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Streaming devices andd other home devices. ROKU has also been moving more into creating streaming content. AMZN doesn't like to share

Spoony Love said:

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I think the $465C is a good straight up trade. Selling the $470 kind of locks in profit right?

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Yes, but it reduces your total cost exposure

Spoony Love said:

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I think the $465C is a good straight up trade. Selling the $470 kind of locks in profit right?

It's broken through $470 before briefly and I think it may do it again soon.

I will say, I'm watching the 12/29 $465C for any dip through the remainder of the week.

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I've learned that the stress of spreads is lower than naked call buying. I'm happy to make the exchange if the R/R is still favorable.

Max Johnson transferring in to the Ags. What a time to be alive.

I've been enjoying the Signing Day radio show this morning. Fun time to be an Ag!

Famous last words... "It can't possibly go any lower"

Ags2013 said:

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Famous last words... "It can't possibly go any lower"

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Hi, my name is IWM, how are you doing?

I can't wait to lose more money Friday when I get my EOY bonus