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TRADING THE WEEK: Trading Picks Up in Wake of Fed, Witching

Traders Magazine Online News, June 19, 2017

John D'Antona Jr.


Traders breathed a huge sigh of relief last week as the markets survived a slew of economic data and the Federal Reserve finally raising short-term interest rates. After spending last week on edge, traders reported the market can now take a breath and relax – allowing investors to take a look at fresh strategies for the third quarter and get trade again.

“We had a lot of data to digest last week, especially the inflation numbers, and they were relatively benign,” said a floor trader in New York. “Inflation look tame and market opinion is that we’re in this very moderate growth/inflation period, which augers well for the market.”

Another trader in Chicago agreed, adding that the current economic picture reminds him of the children’s story Goldilocks.

Sharon Stark

“With the exception of Trump and his tweets, we’ve got a Goldilocks economy t work here,” the Midwest trader said. “We’re in no danger of overheating at the moment. So the Fed can really engage in a nice gradual tightening of rates without the worry of fast inflation or growth upsetting its plans.”

Trading last week signaled a type of relief trade as volume jumped back above the 7 billion share per day level not seen in over a month, as well as the fact Friday was quadruple witching day. Approximately 7.37 billion shares per day changed hands last week compared to the week prior when volume was 6.45 billion shares per day, according to Bats Global Markets.

To recap, the Federal Open Market Committee (FOMC) raised the target Fed Funds rate to 1.00 to 1.25 percent, despite the recent deceleration in inflation and expectations that the 12-month rate will remain below the target 2.0 percent. According to Sharon Stark, managing director of fixed income at InCapital, policy makers cited a falling jobless rate and recent advance in household spending as fuel to allow inflation to rise.

“Current monetary policy is characterized as accommodative to allow for continued strengthening in labor markets, which hopefully inspires higher inflation,” Stark said.

What was of more surprise to her was the release of some details regarding the size of balance sheet adjustments to reduce the Fed’s $4.5 trillion in holdings. She noted the announcement was vague with regard to the timing and target balance of reserves.

“According to the Fed, when the FOMC agrees to reduce its holdings of securities, it will do so by cutting the reinvestment of maturing Treasury securities principal proceeds by $6 billion per month initially, then increasing the amount in steps of $6 billion each quarter over 12 months to a total of $30 billion per month,” she said. “The Fed will continue to trim the deployment of maturity proceeds by $30 billion per month until it is determined that the level of reserves is appropriate given the demand by banks.”

So when is the next hike in rates?

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