STEVEN ENGLANDER: There May Be A Lot Further To Go In This Post-FOMC Sell-Off

Yesterday, the FOMC made no mention of the effects of the fiscal battles in Washington, D.C. in its October statement, something many on Wall Street were expecting.

Before the release, the prevailing consensus was that the Federal Reserve's monetary policymaking body would refrain from tapering until its March meeting, given the potential negative impact of the government shutdown - and a potential repeat in January - on the economy.

Market participants were therefore looking for a nod to fiscal brinksmanship in the statement as a signal to confirm this thesis. When it wasn't confirmed, stock and bond markets sold off as investors re-calibrated positions to reflect a different set of probabilities related to the Fed's tapering timeline.

Steven Englander, global head of G-10 FX strategy at Citi, warns there may be further to go, saying the "market still has a lot of dovishness to unwind."

In a note, he writes:

We enter a 1-month period of data fog. It will be very difficult to compare October to September (and November to October next month) but November to September will be reasonably meaningful. What will matter in coming days is how upcoming Fed speakers spin their decision. Asset markets will come under pressure if they keep repeating that tapering isn't tightening because they have a powerful forward guidance weapon at their disposal. Investors do not believe it. If they stress that the weak data will not make them comfortable with tapering for a good while, risk gets bought again. Today claims will be the focus -- a number under 330k and we are off to the races in advancing the tapering schedule

In terms of the actual tapering path that the market believes, we are far from the early September path. The biggest concentration of probability now is that tapering begins in the January-March period versus March and beyond two days ago. The end point may have pulled back a month but it does not look like investors yet believe September 2014 for the end of QE, let alone June. So a good data point or two and there is plenty of room for asset markets to back up. Figure 1 shows our view of the markets expectations of tapering just prior to the September FOMC, just prior to yesterday's FOMC and today. The path is indicative, not a hard measure of investor expectations, but we would stress how modest the pullback in dovish expectations has been.

Fed speakers begin to hit the tape Friday with speeches from St. Louis Fed president James Bullard, Minneapolis Fed president Naranya Kocherlakota, and Richmond Fed president Jeffrey Lacker.