Wall Street Breakfast: Fed Musical Chairs

Fed musical chairs - Two regional Federal Reserve bank presidents are leaving their positions early in the wake of controversy over portfolio holdings. Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan will depart over the next 10 days. Rosengren announced his Sept. 30 departure early Monday, saying he needs a kidney transplant. He was due to retire in June next year and at the time of the statement there was speculation his involvement in the controversy over the portfolios and trading of Fed officials played a part in the decision.Dallas Fed President Robert Kaplan's announcement that he would leave on Oct. 8 confirmed those suspicions as he said specifically he is leaving to eliminate distractions caused by his trading. Kaplan traded millions of dollars in securities last year, including individual high-valuation megacap stocks that benefit from lower interest rates. Rosengren came under scrutiny for securities tied to real estate and securities the Fed bought last year. Neither ran afoul of any of the current Fed rules on holdings and trading. Fed Chairman Jerome Powell has opened an ethics panel over the issue and said at his recent press conference changes to current rules must happen. Powell reportedly also held securities that the Fed bought.Dot plot shuffle: While a rare occurrence, the loss of two regional presidents underscores the dangers of a market trading as though the Fed is a static entity represented by its Summary of Economic Projections rather than a fluid group where minds can change quickly. Along with the plan for asset tapering, the focus of the last FOMC was on the dot plot of rate forecasts that moved market expectations forward to an initial hike in 2022. Now two of those dots are going away. Rosengren and Kaplan are both in the hawkish camp, with Kaplan considered one of most hawkish voices for the Fed in calling for removal of accommodation. Two dovish replacements could quickly shift the dots back to liftoff in 2023. (District presidents are identified through a search committee formed by the respective bank).When it comes to FOMC voting on rates, the rotation was set to bring in three hawkish regional presidents next year: Rosengren, St. Louis President James Bullard and Kansas City Fed President Esther George, as well as hawkish-leaning Cleveland Fed President Loretta Mester. And there could be further shifts in the Fed makeup. Powell's renomination is not secured. Although it looks like the continuity would please the markets, President Joe Biden could ensure more dovish leadership with Lael Brainard (voting members turn dovish in 2023 and Kaplan now won't be part of that class).Vice Chairman Richard Clarida, a centrist, sees his term expire on Jan. 31, and Randal Quarles sees his position as vice chairman of supervision end on Oct. 13, although his term ends in 2032.Markets still see policy on track. While the game of musical chairs is going on, the bond market is still expecting a global move to tightening as yields keep climbing. The 10-year Treasury yield is up 6 basis points to 1.54% this morning. The 5-year yield, most tied to fed funds rate expectations, is setting a new high for 2020, up 3 basis points to 1.03%.The message coming from Fed speakers is still for tapering to start in November and end in the middle of next year. "Fed presidents exist to provide entertaining and extreme comments to the media, and to dissent from policy decisions only when permitted," UBS Chief Economist Paul Donovan writes. "New York Fed President Williams is the Fed president with authority (having a permanent vote on policy). Williams reiterated the market base case of a quantitative policy tightening this year, and pointed out that a US default would be less than ideal. Markets are well aware of both of these views."In what could be seen as an extreme opinion, Chicago Fed President Charles Evans, who loses a voting slot next year, argued yesterday that the Fed may need to see more inflation. (3 comments)

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Top News Fed musical chairs Shutterstock Two regional Federal Reserve bank presidents are leaving their positions early in the wake of controversy over portfolio holdings. Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan will depart over the next 10 days. Rosengren announced his Sept. 30 departure early Monday, saying he needs a kidney transplant. He was due to retire in June next year and at the time of the statement there was speculation his involvement in the controversy over the portfolios and trading of Fed officials played a part in the decision. Dallas Fed President Robert Kaplan's announcement that he would leave on Oct. 8 confirmed those suspicions as he said specifically he is leaving to eliminate distractions caused by his trading. Kaplan traded millions of dollars in securities last year, including individual high-valuation megacap stocks that benefit from lower interest rates. Rosengren came under scrutiny for securities tied to real estate and securities the Fed bought last year. Neither ran afoul of any of the current Fed rules on holdings and trading. Fed Chairman Jerome Powell has opened an ethics panel over the issue and said at his recent press conference changes to current rules must happen. Powell reportedly also held securities that the Fed bought. Dot plot shuffle: While a rare occurrence, the loss of two regional presidents underscores the dangers of a market trading as though the Fed is a static entity represented by its Summary of Economic Projections rather than a fluid group where minds can change quickly. Along with the plan for asset tapering, the focus of the last FOMC was on the dot plot of rate forecasts that moved market expectations forward to an initial hike in 2022. Now two of those dots are going away. Rosengren and Kaplan are both in the hawkish camp, with Kaplan considered one of most hawkish voices for the Fed in calling for removal of accommodation. Two dovish replacements could quickly shift the dots back to liftoff in 2023. (District presidents are identified through a search committee formed by the respective bank). When it comes to FOMC voting on rates, the rotation was set to bring in three hawkish regional presidents next year: Rosengren, St. Louis President James Bullard and Kansas City Fed President Esther George, as well as hawkish-leaning Cleveland Fed President Loretta Mester. And there could be further shifts in the Fed makeup. Powell's renomination is not secured. Although it looks like the continuity would please the markets, President Joe Biden could ensure more dovish leadership with Lael Brainard (voting members turn dovish in 2023 and Kaplan now won't be part of that class). Vice Chairman Richard Clarida, a centrist, sees his term expire on Jan. 31, and Randal Quarles sees his position as vice chairman of supervision end on Oct. 13, although his term ends in 2032. Markets still see policy on track. While the game of musical chairs is going on, the bond market is still expecting a global move to tightening as yields keep climbing. The 10-year Treasury yield is up 6 basis points to 1.54% this morning. The 5-year yield, most tied to fed funds rate expectations, is setting a new high for 2020, up 3 basis points to 1.03%. The message coming from Fed speakers is still for tapering to start in November and end in the middle of next year. "Fed presidents exist to provide entertaining and extreme comments to the media, and to dissent from policy decisions only when permitted," UBS Chief Economist Paul Donovan writes. "New York Fed President Williams is the Fed president with authority (having a permanent vote on policy). Williams reiterated the market base case of a quantitative policy tightening this year, and pointed out that a US default would be less than ideal. Markets are well aware of both of these views." In what could be seen as an extreme opinion, Chicago Fed President Charles Evans, who loses a voting slot next year, argued yesterday that the Fed may need to see more inflation. (3 comments)       Energy Natural gas surge U.S. natural gas prices soared to their highest level in more than seven-and-a-half years, with traders citing contagion fears as gas and other energy shortages sweep Europe and Asia, which is leading to heavier demand for U.S. liquefied natural gas. Front-month gas futures (NG1:COM) for October delivery settled up 11% to $5.706/MMBtu, the highest closing price since February 2014 and the contract's biggest daily percentage gain since this February's Texas freeze. "Spectacular prices around the world are feeding into the sentiment here," Again Capital's John Kilduff tells Reuters, adding that "gas as a commodity is getting repriced" and "now that we've hit these price heights, it will be easy to do it again." (107 comments)       IPOs NordicTrack IPO NordicTrack parent iFIT Health & Fitness (IFIT) released details Monday for a planned IPO that could value the firm at up to $6.7B. iFIT said in a revised S-1 filing with the U.S. Securities and Exchange Commission that it plans to offer some 30.8M Class A shares within an $18-$21/share range. It's also granting underwriters the option to buy as many as roughly 4.6M extra shares for overallotments. Plans call for the stock to list on the Nasdaq under the ticker symbol "IFIT." (3 comments)       Sponsored by SS&C ALPS Advisors Exposure to Master Limited Partnerships with one ETF - AMLP Energy infrastructure master limited partnerships (MLPs) play a vital role in connecting energy production with local and global demand by transporting, storing, and processing hydrocarbons, as well as facilitating exports. Do you have energy infrastructure MLPs in your portfolio? Alerian MLP ETF (AMLP), the largest*, most liquid MLP ETF, provides exposure to energy infrastructure MLPs with an emphasis on tax-advantaged income (no K-1). Explore AMLP See important disclosures. ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund. * Based on the ETF.com peer group segment Equity U.S. MLPs: Master Limited Partnership. Automotive Ford EV bet Ford (NYSE:F) unveils plans to team with South Korean battery maker SK Innovation to spend $11.4B to build an electric F-150 assembly plant and three battery plants in the U.S., in a substantial acceleration of its push into electric vehicles. Ford will build two massive battery factories in Glendale, Ky., and a third in Stanton, Tenn., alongside a new truck factory set to begin producing electric F-series pickups by 2025, creating 11K jobs. The company says the planned $5.8B Blue Oval City complex in Tennessee "will usher in a new era for American manufacturing," comparing it to the Rouge complex in Michigan a century ago. (69 comments)       Global Evergrande fallout China's central bank said it will protect consumers exposed to the housing market, though it didn't specifically name debt-laden China Evergrande (OTCPK:EGRNF, OTCPK:EGRNY), Reuters reports, giving investors some confidence that spillover effects from the developer's liquidity crisis may be manageable. Evergrande missed an $83.5M interest payment on March 2022 bonds on Sept. 23 and is scheduled to pay a $47.5M coupon on Sept. 29.

In addition to the People's Bank of China statement, the Shenzhen government started investigating Evergrande's wealth management unit, Reuters reports, citing a letter to investors, another sign that authorities may take some action to contain the fallout from the real estate developer's troubles. (1 comment)

     

Today's Markets

In Asia, Japan -0.19%. Hong Kong +1.20%. China +0.54%. India -1.63%.
In Europe, at midday, London -0.34%. Paris -1.22%. Frankfurt -0.78%.
Futures at 6:20, Dow -0.31%. S&P -0.66%. Nasdaq -1.31%. Crude +1.03% at $76.23. Gold -0.54% at $1742.50. Bitcoin -4.2% at $41866.
Ten-year Treasury Yield +4 bps to 1.524%

Today's Economic Calendar

8:30 International Trade in Goods (Advance)
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
8:55 Redbook Chain Store Sales
9:00 Fed's Evans Speech
9:00 S&P Corelogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
1:00 PM Results of $62B, 7-Year Note Auction
1:00 PM Money Supply
1:40 PM Fed's Bullard Speech
3:00 PM Fed's Bostic Speech
7:00 PM Fed's Bullard Speech

Companies reporting earnings today »

What else is happening...

Activision Blizzard (NASDAQ:ATVI) struck a deal with EEOC to settle discrimination claims.

U.S.'s 5.2% unemployment rate is understated; Jerome Powell Senate testimony.

Disney's (NYSE:DIS) 'Shang-Chi' wins fourth week, becomes top 2021 film.

Aurora Cannabis (NASDAQ:ACB) CEO: Focusing on medical revenue rather than chasing recreational business.

Raytheon (NYSE:RTX), Northrop Grumman (NYSE:NOC) successfully test fire hypersonic weapon.

Sanofi (NASDAQ:SNY) reports positive interim results for its first mRNA COVID-19 vaccine candidate.

Merck (NYSE:MRK) closing in on deal for Acceleron (NASDAQ:XLRN) - WSJ.

Facebook (NASDAQ:FB) is unstoppable, even if it's toxic to our mental well-being - Loup Ventures' analyst.

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