MBS Day Ahead: FOMC Day: Could be a Market Mover

I worked really hard just now on avoiding the use of the cliche headline opener "all eyes."  You see that a lot (no pun intended) when it comes to things like FOMC and NFP.  For instance: "All Eyes on FOMC." 

It's true though.  Every market participant cares about the Fed, but many of them only care if the Fed says something surprising.  With that in mind, let's talk about what would be surprising in terms of changes in the statement.

1. It would be a massive surprise if the Fed DOES NOT end QE3 asset purchases.  Pundit surveys are running well over 95% in that regard.  Not only would it be a surprise to see the Fed keep, say, $5 bln a month for now, but it would be a dead giveaway as to their level of concern about 'something' (where the 'something' could be any combination of inflation, wage growth, or the general state of the global economy).  In that sense, the Fed can't really afford not to end QE3 purchases, because if they don't, markets would freak out even more as they contemplate what the Fed is so freaked out about.

2. It would be a surprise to see a significant shift in the Fed's assessment of economic growth.  Simply put, they have to expect the economy to 'keep on truckin' or else removal of accommodation would be like dividing by zero.  Markets will really freak out if the Fed comes off as concerned while simultaneously firing off its second to last arrow (the last being zero rates). 

3. It would be a surprise to see anything in the Fed statement that accelerates the rate-hike outlook.  In fact, you can safely assume that only the most hawkish, craziest, monetary conservatives are even thinking about a rate hike any time before the middle of next year, and the majority of the Fed board wouldn't be surprised to see a 2016 hike.  Markets know this.  Fed Fund Futures are currently priced for a 50/50 chance of lift-off in September 2015.  It had been much higher than 50/50  last month, but spiked with the big October market moves.  Unlike Treasuries, Fed Funds Futures haven't bounced back from those big moves ahead of the Fed.

Long story short, it would be a surprise for the Fed to do anything other than try NOT to be a market mover!  In fact, there's a very good chance that the Announcement will lack any inherent market-moving punch.  Unfortunately, it arrives at a time where markets are looking for guidance and ready to read-in as much as possible to whatever the Fed says (or doesn't say). 

Not only that, but the ceremonial "End of QE3" Fed Announcement just seems like a good time to be making bigger bets on the direction of rates, doesn't it?  After all, how many annoying timeline charts are floating around the internet that claim to line up big-ticket changes in rate momentum with the big-ticket changes in Fed asset purchases?  Heck, I'm sure even I've done one at one point (though it may have been to point out how the others were silly).  You get the point though.  "The End of QE3" just sounds like it's supposed to be a big deal, even though the Fed will be doing everything in its power to make sure it isn't.