MBS Live Recap: Be Really Careful About What You Read

Here's why financial news sucks so bad...  Sorry, I said "sucks."  I realize that might offend three of you, but I'm willing to alienate that half of my audience to emphasize this point.  On days like today, where (and I promise you!) the immediate reason for the market movement is not readily apparent to the average onlooker, it's all too easy for an idea to take hold and soon get credit for market movement it didn't create. 

Reporters, analysts, and even traders are hungry for "the why" behind what's going on.  When markets are moving quickly, it's easy to stop searching for "the why" too quickly and accept the first answer that sounds plausible--especially if you hear it in more than one place.  Then YOU become another source of news regarding "the why," making the next person looking for answers all the more likely to believe their search is over by the time they've heard your answer for the 7th time.

That was the case with today's Fed speakers.  At a certain point, I had to simply stop reviewing our internet news feed because it was just so bad.  Story after story about one of several of today's Fed speakers gave them credit for the market carnage.  They don't deserve it, and I know what does.  

But here's the interesting thing: does it matter?  For instance, if the news and 47 contacts in your circle tell you that a press release about a speech from Lael Brainard scheduled for Monday is the reason markets are selling-off, and if you sell bonds based on that information, hasn't that news now moved markets?  Tangled webs, my friend, tangled webs (even though the deceit is not intentional in this case---people are just looking for answers).

Here are answers: Fed speakers may have contributed to the selling that was already in progress, but the origin of the selling is the ECB.  Specifically, markets were thrown for a bit of a loop yesterday by how Draghi handled the topic of the ECB's proverbial punch bowl (or "allowance" depending on your prefered metaphor).  In not so many words, Draghi did less to reassure markets about the continuation of the ECB's aggressive policy.  It's a potential sea-change of the same magnitude as the earliest hints of the taper tantrum.  

Granted, we're far from a repeat of May 2013, but the most insidious effect of doubting ECB accommodation is that ECB accommodation is one of the main things preventing the Fed from hiking.  In fact, you better believe that if the ECB and Bank of Japan weren't keeping rates negative and buying a ton of assets, that the Fed would have hiked months ago.  It's not so fashionable for the Fed to tell you they're that beholden to global financial markets, but history proves the point.

On a final note, if there was any doubt about the potency of yesterday's  ECB news vs today's Fed speakers, consider the fact that Treasury futures volumes were just slightly higher yesterday.  That's pretty striking considering today's market movement feels so much bigger.   I will concede that markets will either kick this sell-off into high gear or calm down significantly after Brainard's speech on Monday, but again, is that because it really mattered, or simply because everyone else told you it did?  Oh no... now I'm one of them!  (But I'm trusting you to break the cycle!)