The FOMC is going on a two-year vacation...Can I join?

www.themacromindseye.com - Twitter @JohnNetto

We're very close to being 1/12th of the way through 2012, which means that if you've not done any pondering about the wide wonderful world of markets, you'd better get on it. Here are a few points I've been pondering in recent days.

1- 5 yr USTs are about 75bps at the moment yet the Fed just came out and toldthe market that policy rates are going to be in and around 25bp for 40% oftheir lifespan. Shouldn't that leave room for a 50handle on 5s?

2- While the commitment to forgo a conventional rate move for 2 yrs was the headline from the FOMC yesterday, the bigger news may have been the statement's dropping the term "tools" when talking about what could be done if the economic backdrop worsens. Instead the Fed explicitly suggested that they would engage in further balance sheet tweaks. This sounds to me like a committee that has become very comfortable with QE. I suppose that between the two  rounds of QE and the Twist there is some causeto be more comfortable as there has been a pretty reasonable tick up in the economic environment after all 3 exercises. All of which is to say that if unemployment stays unimpressive QE3 is coming.

3-I know that the FX market has gotten all wound up about JPY weakness the past few days. Many an FX sell-side strategist has spent their time arguing that the Japanese government's inability to come up with a credible budget plan and the lack of trade surplus in 2011 will be the demise of JPY. But in light of what sounded like a dovish Fed yesterday shouldn't JPY strengthen not weaken. I mean if we're really going to see 50bp on 5yrs, why would any Japanese investor be involved in UST, they can get the same de-minimous yields at home and don't need the CCY headaches.

4-Of course a lot of the move in JPY isn't about yields or fundamentals but rather the very large IMM longs and foreign holdings of Japanese t-bills. So maybe we'll get another few days of JPY weakness. But if you really do believe that we're nearing a true credit event in Japan one thing to remember is that JPY credit downgrades and other domestic fears have tended to result in a stronger, not weaker JPY over the past two decades. I can't see why this time will be different

5-I know that the Greek PSI talks seem to be the major EU driver over the past week or so. But did you notice that EU sov spreads tightened last week as we went into the EU summit and have widened since. Where have we seen this pattern where there is tightening into big EU meetings and widening afterward? Try the past 30 over-hyped EU summits....

6-Earlier this week I wrote about the EUR-risk correlationbreaking down giving some explanations for the end of the long standing relationship.This week it seemed that the relationship between EU sov spreads and the EUR broke down. Now on the surface this seems a bit inexplicable and the impulse to just chalk it up to flows/positions is a valid one. But I wonder if this doesn't have something to do with the market sensing that we're getting close to seeing the long awaited EU bazooka. There has been a lot of talk of a bigger IMF war chest and an acceleration in the ESM set up in recent weeks. I wonder if these rumblings along with the LTRO haven't taken the tail risk out of the EU crisis and hurt the vigor out of EUR shorts.

7- Of course this does beg the question if the EU/ECB/IMF etc do roll out the bazooka, shouldn't this be cause for an even lower EUR? It's not like the region'seconomy is going to be fixed (imbalances and all). It's not like the fiscal and banking headwinds disappear and oh yeah the bazooka could very well amount to a massive printing exercise. To me that can't be EUR supportive. But the bigger point of it is that it's extremely supportive of gold which I believe will have a date with $1900 if we see that EU bailout bazooka in full force.

8- On the topic of EU bailouts. If you haven't seen George Soros's blueprint torelieve Italy and Spain's debt burden in the FT today check it out. While it's a little technical it's also very reasonable and shows that if the Europeans wanted to fix their problems they could.

9-While no one was looking most EM asia CCYs are +2 - 4% on the year. What's more surprising about this? The fact that it comes as many CBs in the region are cutting policy rates or that the levels of "smoothing" by C.banksin the region has been lack luster compared to the recent past?

10-Speaking of surprises... Did I hear the President encourage fracking and more or less say "drill baby drill" at Tuesday's state of the union? If I did it not only represents a big shift in the adminisitration's relationship with domestic energy production. Politics and flip-flopping aside to the extent that Obama or his replacement does follow through on this commitment the notion that the US will become energy self-sufficient in the not so distant future will come more mainstream and it won't take much for the market to figure out that this turns the US's trade deficit on its head.

And your bonus point to ponde:

Another point of interest in Obama's speech was how he framed the question of changing the tax code to make it more equitable. In recent days Mitt Romney has stepped on a political third rail by revealing that he paid sub-15% in taxes on his income in 2010. But what seems a bit unfair is that almost everyone has forgotten the technicals behind how Mitt managed to pay such a low effective rate. His income is what we used to call passive and there is a good argument that it is actually already taxed. This editorial piece inthe WSJ the other day made this very interesting point http://on.wsj.com/zxNsyT