As FOMC meeting has started today and going to end up
with FED statement and Mr. Bernanke’s press conference markets across globe has
started breathing high though investors are optimistic that FED will not seriously announce anything but even Mr.
Bernanke’s statement
That economy is growing at satisfactory level would be
enough for market to react negatively but looking at latest unemployment rate which
is 7.6% and much higher than satisfactory level it’s kind of difficult for Mr.
Bernanke to rejoice.
Financial Markets around the world are facing a severe
volatility induced by divided views & uncertainty over the outcome of the
FOMC meeting on Wednesday & the US Fed’s stand on the monetary policy.
Will he? – Won't he? – continue QE or start Tapering
off?… are among the many questions that traders & investors around the
world are worried on. Will the Fed’s monetary
policy be ratcheted down at the next Federal Open Market Committee (FOMC)
meeting? Or will QE3 asset purchases be gradually reduced starting in 2014? The
markets are looking highly nervous in general these past few weeks, inducing
hyper volatility as the blindly bullish sentiment seems to be tapering off
without knowing what the Fed’s clear plans are. Uncertainty rides high on the
future movements of the most important fundamental driver of US equity
markets – the Fed’s monetary policy & the future of the Quantitative Easing program.
Subsequent to the FOMC meeting ending on Wednesday, the markets will be
witnessing a briefing from Bernanke that
will no doubt move the markets in one hell of a big way. The Wall Street, more
than any other, will wait anxiously to hear if the Fed will continue or start
tapering its $85 billion a month in bond purchases.
Market
awaits the most important FOMC statement in years:
The financial markets have hit some
turbulence triggered by huge uncertainty in the lead-up to the FOMC statement
due Wednesday. The fate of the centrally-planned markets lies in the hands of
the Fed Chairman Bernanke & his decision to taper, or not to taper. The
current nervousness in the market, synonymous with possible disturbances given
the approach of tapering, could prompt the Fed to postpone any announcements.
On the other hand, improving economic indicators appear to confirm the scenario
of an exit. I do not expect any major change for the immediate future but the
Fed could announce additional guidance that’s specifically related
to the timing and rate of the eventual wind down of the QE. The Fed’s latest
projections, made in March this year, saw real GDP growth of around 2.6% for
2013 and 3.2% for 2014. In terms of unemployment, the Fed projected a rate of
around 7.4% in 2013, improving to around 6.9% in 2014.
Let’s see – If the Fed does start tapering,
the smart money surely goes out with it, causing the market to go extremely
bearish. The current bull market in stocks does not have enough strength to
stand on its own and cannot continue to rise in the face of the Fed tapering.
This is a case that the Fed is certain of & may not like, so any chance of an
immediate tapering is out. Maybe then the other alternative is a FOMC statement
that surprises everyone which announces that the Fed is going to continue
QE at full force. This will surely pump up the Market adrenaline & rises
like never before will be seen soon enough – But will be Highly negative for
the US Dollar but
only mildly positive for Gold &
Silver. This certainly serves the purpose & could be a potential
option. The falling dollar could prove bullish for metals & raw
commodities, triggering higher inflation, which in turn will be extremely
positive for Silver more than Gold, which booms in adverse scenarios
& not positive ones.
Market
Contrarian Views on the Fed’s Tapering:
Do not forget that the QE isn’t intended to help the US
Economy, as apparent. It’s intended to keep the – Too big
to Fail banks (both domestic and foreign) solvent and to keep
the Government outfitted with low-cost Treasury bond financing.
Skeptical? Then spend some time reading this. Based on two key factors,
not only will the Fed not taper, but it will be ultimately forced to up the
ante on QE or risk a serious accident in the banking system and in the economy.
Here’s the full article: If The Fed Tapers, It Risks Triggering A Stock Market
Avalanche – Here’s Why
Two more pieces of data reported today that further
reinforce the argument laid out in the article. First, per the monthly
TIC report, which details foreign cash flows in and out of our system, Treasury
bond sales by foreign investors (mainly central banks and hedge
funds) hit a record in April: LINK The Fed will actually have to
print more money to replace that money or risk significantly higher
rates. And second, in another of a long string of disappointing economic
reports, May’s industrial production report came in flat vs. the expected up
.2% and capacity utilization declined. This further confirms that
manufacturing and end-user demand is dropping. This will give Bernanke
further room to, minimally, keep QE where it is and, ultimately, justify taking
it up a notch sometime this fall.
Vital
Market Indicators that could keep the Fed from tapering:
The World Bank reduced its global economic
forecast to 2.2% in 2013 – from a previous 2.4% estimate, and lower than
the 2.3% performance in 2012. From an economics perspective it was just a
matter of time before conditions began to break down; gains in equity indexes
to record highs amid sluggish economic performance were simply unsustainable.
The bifurcation between the CRB index and the S&P 500 first appeared in
December 2012. The S&P
500 now looks as if it will rejoin the commodity benchmark. In
the U.S. continued signs of frailty have surfaced, perhaps underscoring
the likelihood of an economic slump. Detroit is on the brink of bankruptcy, and
several top tier indicators are flashing warning signs. Economists polled by
Bloomberg forecast U.S. GDP to increase a lowly 1.9% in 2013, after a 2.2% gain
in 2012. Last week’s economic tea leaves revealed that job openings
declined in April and retail sales advanced 0.6% in May. Retail sales excluding
autos were only 0.3% higher. The total business inventory-to-sales ratio
increased to 1.31 months – the highest level since October 2009 (1.32)
when the U.S. economy was in the initial stages of recovery from the Great Recession.
Import prices were decidedly deflationary as the
overall figure fell 0.6% last month, and were 1.9% lower than in May 2012. All
of the associated core measures (ex food, energy, etc.) were also contracting
on a year-over-year basis. Deflationary pressures may also be seen in the
wholesale channel. Core intermediate producer prices, (a closely followed
barometer for potential inflationary or deflationary pressures), fell 0.3% in
May and was 0.2% lower than a year ago. This is not an economically compromising
level, but it should keep the Fed from tapering its accommodative monetary
policy.
Treasury budget deficit for May was reported to be
$138.7 billion vs. an expected $110 billion – Bloomberg. The government spent
$335 billion in May, the largest May outlay and the fourth largest one-month
outlay in history. The May budget report shows that the government is spending
more and taking in less revenue than was expected by the market just a month
ago.
The cumulative Fiscal
deficit for the first 8 months of Fiscal Year (FY) 2013 is $629
billion. Incredibly, the CBO reported on May 9, that is was projecting a full
FY 2013 of $642 billion. The total deficit for 2013 would be $871 billion,
or nearly 36% higher than projected by CBO and expected by the market just a
month ago. That would also mean that the Treasury would have to issue $229
billion more in new Treasuries than is expected. It is likely, however that the
deficit will be even larger than $871 billion. The US Government is
currently spending at a rate of $303 billion per month this year vs. revenues
of $225 billion per month. Assuming those metrics remain constant for the
last four months of FY 2013, the final spending deficit would be $936 billion,
requiring nearly $300 billion in additional Treasury debt. To be sure, Treasury
Secretary Jack Lew has already stated that he can delay making payments into
the Federal pension fund plus a few other “tweaks,” in order to avoid hitting
the mandated Treasury debt ceiling by the end of FY 2013 at the end of
September. But his accounting maneuvers would push those spending requirements
into FY 2014 and not address the actual spending deficit. In addition, the
monthly revenue calculation includes a one-time $59.4 billion payment from
Fannie Mae and the one-time tax windfall that occurred in December from
investors selling assets ahead of the tax increases that hit January 1. In
other words, the monthly revenue rate into the government is likely higher for
the first eight months than it will be for the final four months, which implies
that the final deficit for FY 2013 could easily hit $1 trillion.
Fed QE purchases of Treasury bonds are currently de
facto funding 75% of all new Treasury issuance. On the assumption that the
government’s spending deficit will continue to widen more than is currently
anticipated, the Fed will have no choice but to maintain – at a bare
minimum – its current level Treasury purchases or risk sending interest rates
significantly higher in order to induce enough outside investor money to
replace the Treasury financing being funded by the Fed. Any discussions about
Fed tapering are predicated on the faulty assumption that the Federal spending
deficit will continue to narrow vs. 2012.
The final major economic release last week was the
Fed’s industrial production report for May. The second quarter is off to a
very slow start as total production was unchanged in May and contracted 0.4% in
April. Industrial production peaked in mid-2010 (8.5% versus 1.61% today), and
the regional Fed manufacturing indexes are all in contractionary territory.
Electricity output has fallen in each of the last five weeks (on a
year-over-year basis), and shipments of nondefense capital goods excluding
aircraft plunged 1.5% in April – all in all, a messy beginning to the second
quarter – Bloomberg.
Meanwhile, market conditions in Asia are worrisome.
Chinese indicators have been lukewarm. In addition, the BoJ’s policy is raising
more and more questions about its capacity to control the volatility it ignited
on JGBs. The government’s timid measures announced last week, along with
promises of more substantial measures in the autumn, are anything but a
bazooka. Against this backdrop, and as long as uncertainty remains on both
fronts, additional profit-taking on previously overbought assets is highly
likely. Nevertheless, we continue to believe that this profit-taking phase will
end up losing steam.
It is evident that each of the above key topics is not
yet at a point in time in which FOMC members will be swayed to taper the
monthly $85 billion asset purchases of quantitative easing.
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