TAKING A PAGE FROM THE RISK ON PLAYBOOK
The markets have been fairly well behaved as bets are increasing that central bank liquidity will continue into the foreseeable future. We suppose that this is mostly in line with the feeling that the Fed will not raise rates this year and will likely wait well into the first quarter of 2016 before starting the tightening process. While this is consistent with the view that we adopted after missing horribly on our September call, we feel that the risk is to an even later lift-off than our March, 2016 hypothesis. Fed speak continues to mostly support the party line that a rate-hike remains a distinct possibility this year, although the market increasingly does not care/does not believe their line of reasoning. Instead, the most significant Fed speak was delivered by the highly dovish view of 2-governors that questioned the sensibility of raising rates this year (Brainard and Tarullo). Lael Brainard in particular cited international developments as concerns that warrants patience in the lift off process, while calling into question the ability of a tight labor market to generate expected inflation. These views/comments fly in the face of the exhaustive presentation provided by Chairman Yellen just a few weeks ago, pointing to potential fissure developing within the FOMC. Ultimately, the market chose to ignore the more hawkish rhetoric from the 2015 camp, but rallied risk asset on the more dovish views.