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Global Macro CommentaryOdds and EndsMonday, December 15, 2014

Guy Haselmann(212) 225-6686Director, Capital Markets Strategy

John ZawadaDirector, US Rate Sales

Fed The Fed pathto policy normalization has already begun. QE ended six weeks ago. Forward

guidance is almost certain to end at the meeting on Wednesday, leaving lifting rates off of

the zero lower bound as the only remaining measure to reverse (early 2015).

These wildly accommodative measures encouraged speculationin asset prices with thehopes of creating a wealth effect. It should therefore not come as a surprise that wild market

volatility is occurring as the Fed attempts its policy pivots.

These changes to policy do not just withdraw stimulus, but also push the Fed-put fartherout-of-the-money. In such, risk/reward expectationsadjust accordingly (less upside,

greater downside).

o The only way this last statement does not lead to a paring of speculative assets is if: 1)the economic fundamentals justify valuations; and 2) speculators are willing to

maintain their risky assets because they have enough confidence in the Feds ability to

exit extraordinary policy conditions without provokingan adverse impact on

markets or on the broader economy (highly-unlikely).

Market volatility and geo-political concerns makes Wednesdays FOMC meeting a challengefor Fed communication. The Fed is likely to be modestly hawkish (a flattener), as it finds

the delicate balance between acknowledging the improving US economy (primary objective)

and the worsening geo-political and global economic outlooks (secondary concern). At thispoint, the Feds only choice might be to sound hawkish to instill confidence by recognizing

recent improvements in the economy, while down-playing recent market volatilities and

foreign concerns.

Some have argued that the fall in oil and commodity prices will hurt the Feds ability toachieve its dual mandate. However, the Fed could argue that the drop in food and energy

prices will provide a nice boost to real wages.

It is counter-factual to know, but I believe the Fed over-played QE and should have hikedrates already. The US economy would have been able to handle it. Through its transition

process, the markets are going to be highly volatile. Unfortunately, the longer the Fed waits,

the greater the probability the Fed misses its window of opportunity and the worse the

financial market fallout could be.

ECB

Six months ago, Draghi promisedto expand the ECB balance sheet by 1 trillion, yet thebalance sheet today is actually smaller.

Over this time period, the market has come to realize that increasing the balance sheet by 1trillion with only ABS and covered bonds was mathematically impossible, so hints and

expectations for sovereign QE developed.

The market is now just beginning to realize that ECB supportfor Sovereign QE may also besuspect or limited. The language around the balance sheet growing by 1 trillion was even

changed from expected to intended. Expectations for a large and effective program are

too optimistic.

The press has suggested that there are 6 ECB members against such action, including 3executive board members (Lautenschlager, Mersch, and Coeure). Without German support,

it is likely that the ECB would be able to deliver a token program, if anything can be

delivered at all. A whatever it takes program is expected by markets, but disappointment

is likely. Periphery spreads are fully priced and have room to widen.

The EU imports the majority of its energy needs. Therefore, most argue that the decline inoil is wonderful news. However, benefits to the EU consumer are dwarfed by those of the

US consumer. EU petrol is taxed considerably limiting the benefits that get passed down to

EU consumer. In addition, the depreciation of the Euro (and other currencies relative to the

US dollar) makes the oil drop in Euro terms less beneficial.

Russia Congress approved more sanctionsagainst Russia. The Ruble basket lost 11% today. WTI

and Brent crude lost 4.5% and 2.6% respectively. Expect Putin to announce counter-

measures or take provocative actions soon to play the nationalistic card.

I thought that you were driving, but youve given me the wheel / Theres rain clouds outthere, that you dont wanna feel -Pink

FOMC Speeches

Key Events

FOMC Dec

BoJ Dec

BoE Jan

ECB Jan

RBA Feb

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