Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The business media likes to hype up almost all of these Federal Reserve meetings as if there is a seismic shift afoot due to a comma being moved in paragraph 4 of the statement, or if the word gradual is changed to average in paragraph 2. It’s a lot of nonsense to try to create an event where there is none. However, today’s FOMC announcement has the potential for more impact than the usual dog and pony show. Since May, when it was first floated that some form of “tapering” (not the correct word really) of quantitative easing could be afoot by the end of the year yields on 10 year rates have backed up considerably – brushing along the 3% level recently.
With economic data still mixed and Bernanke set to leave after this term there is still debate on what will happen today although the consensus is around “taper lite”; i.e. not a full taper of $15-$20B a month and not no taper, but something to get the ball started before Bernanke leaves his position… i.e. $10B a month. Of course there could be no taper which the algobots will love, but it seems unlikely that there will be more taper (anything over $15B) than the market expects because if anything is clear the Bernanke Fed is a slave to the stock market and never wants to do anything to upset it. Here is a list of expectations by major investment banks; in fact the entire piece from BusinessInsider is worth a read.
- an Hatzius, Goldman Sachs:Â $10 billion all in Treasuries
- Vincent Reinhart, Morgan Stanley: $10 billion all in Treasuries
- Aneta Markowska, Societe Generale: $10 billion all in Treasuries
- Drew Matus, UBS: $7 billion in Treasuries, $3 billion in MBS
- Joseph LaVorgna, Deutsche Bank: $10 billion in Treasuries, $5 billion in MBS
- Michael Feroli, JP Morgan: $10 billion in Treasuries, $5 billion in MBS
- Neal Soss, Credit Suisse: $10 billion in Treasuries, $10 billion in MBS
- Michael Hanson, BAML:Â $10-$15 billion total, split evenly between Treasuries and MBS
- Michael Gapen, Barclays:Â $15 billion total, split between Treasuries and MBS
Whatever the case expect a sleepy morning and then fireworks this afternoon. This is also one of the meetings Bernanke has a press conference so if no taper now, it is doubtful it would be done until the next meeting where there is a press conference. The market reaction to any tapering will be interesting; not just the stock market but bonds and the dollar. The main thing the Fed wants to stop is the idea that tapering means a long direct path of ‘tightening’. They have said this repeatedly but the market doesn’t seem to listen. Just as they could reduce QE by $10B today, they could in 6 months increase QE by $10B if the economy is not responding, etc.
We enter today extremely overbought short term as the market is in the midst of another V-shaped rally; only 1 session has been down in the S&P 500 the entire month.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/index.php/the-fund/holdings
