Fed minutes, oil price drop and Danielle Booth

After having written at length about the OPEC meeting and its consequences on oil prices, yesterday’s price move in the oil market was a bit puzzling. The Brent crude dropped from the highs of near 78$/bbl to lows near 74$. One other market which behaved in a strange fashion was US yields which dropped close to 9 bps for the 10-year benchmark. The yields are trading at their lowest level since end February. But isn’t the market supposed to behave in a puzzling manner otherwise the tribe of commentators would have been very rich by now. This strange quality of unpredictability of short-term movement is described by a phenomenon known as stochastic movement in which the process under observation displays random movements. There can still be a trend or a drift but that will be identified only a much larger timescale.

Readers can now see that such movements can only be explained not predicted. The explanation process is nothing but a best fit exercise. US yields went down because the sentiment suggests that the “growth is fragile, inflation is transient and hence the easy money is going to continue”. These broad-brush explanations seem to fit in a variety of scenarios where a single event is hard to pin. However today one can look forward to some data which has some real predictive power. Today will see the release of FOMC minutes for the Fed’s June meeting. We remember that in this meeting Fed showed a slightly hawkish tone with SEP showing the possibility of two rate hikes along with an increased GDP and inflation expectations. The most memorable was Powell’s reference to “talk about the talk of tapering”. Fed minutes include the combined assessment of all the committee members and staff projections, even the members which don’t eventually vote but influence the thinking with their intellectual inputs.

On the topic of Fed meetings one of our favourite reads has been a book by the name Fed Up by author Danielle Dimartino Booth. Booth has served as an advisor to Dallas Fed for a period of 9 years and the book presents a scathing indictment of how the Fed’s policies have given rise to a form of mutated capitalism. Though that is a discussion we will keep for another day. Today staying course on Fed meetings, we will recount one of the scenes at a Fed meeting around the GFC time which the author attended. She writes that there was an animated discussion at every word of the statement. Is “edge up” a right phrase or “increased” is the right one in the context of inflation or shall it be dropped altogether saying that it remained in a comfortable zone without any reference to its direction. The whole sequence describes the enormous market moving potential of every word of the statement. The minutes though are in the same league but still provide enough fodder for the markets to move.

Domestically the bond markets have experienced a sharp movement with the 10-year moving up by 10 bps in yesterday’s trade. It currently deals at 6.18 against the low of 6.04 on July 1^st. The choice of securities in the GSAP 2.0 which will be executed tomorrow was seen as one of the reasons for this sudden spike. Rupee is trading at 74.70 currently.