The Fed’s Consternation

I have begun the process of archiving my old verse on my blog.  As of now, everything I have from 2009 is on so if you are interested, click the link and peruse them.  While you are there, you can sign up to follow the blog, which will automatically send you each morning’s report.  I expect to have 2010 and 2011 done over the next several days.

Much to the Fed’s consternation
The market’s most recent translation
Of Chairman Ben’s speech
Was QE would screech
To a halt, causing Ben much frustration

In response we got speeches from two
Presidents of the regional crew
The word ‘exit’s not right
Nor will money get tight
When QE’s days are finally through

Markets are funny things.  Understanding what drives prices and anticipating how they will respond to particular signals is a game fraught with difficulty.  As I wrote last Thursday, historically Central Bankers (and truly government officials on the whole) typically don’t do this very well.  At least based on the remarkably stupid things that they regularly seem to say.  Anyway, it is clear that the Fed was unhappy with the market’s interpretation of Bernanke’s recent press conference and so he sent two of his minions, Fisher and Kocherlakota, out to try to explain further the Fed’s thought processes.  What we learned was that “the word exit is not appropriate” for what the Fed is doing, according to Fisher, and that even if it is, policy would still remain accommodative “for a considerable time” afterwards according to Kocherlakota.  On the surface, these seem somewhat contradictory statements.  It is almost as if they want their eventual reduction in purchases to be ignored as a market signal.  Rather, they would prefer that the economy continue to merrily roll along without the Fed having to do anything special.  Alas for them, that is never going to be the case, and so the process of messaging will remain highly uncertain and extremely difficult.

All that said, the message from the two non-voters seemed to be accepted by the markets as we have seen equity markets bounce modestly, Treasuries rally slightly and the dollar soften a bit.  I don’t think it was the overnight data, which was extremely light, but the other possible catalyst for this bounce could have been comments released from the PBoC, where they indicated that they will keep money market rates at a “reasonable” level going forward.  Those comments were sufficient to reverse a 6% decline in the Shanghai Composite, and perhaps settle market players’ nerves a bit further.

One of the other things I have learned over my extended time in markets is that high volatility tends to come in short bursts.  It is very difficult for traders to continue trading in high volatility environments for extended periods, they literally just get too tired and step away, so given what we have seen over the past several weeks, it would be reasonable to expect a bit more quiet until next week when we get the payroll data.

For the rest of this week, we do have some interesting data being released, notably Durable Goods this morning and the PCE Deflator on Thursday.  The latter is the Fed’s preferred measure of inflation (clearly not one that has anything to do with our everyday lives), but they will respond to that signal rather than CPI.

Today Durable Goods


-ex Transport


S&P/Case Shiller


Consumer Confidence


New Home Sales


Wednesday GDP (Q1)


Personal Consumption


Thursday Personal Income


Personal Spending


PCE Deflator


Initial Claims


Continuing Claims


Friday Chicago PMI


Michigan Confidence


So for today, I expect that we will continue the consolidation of the bulk of the recent moves without significant volatility.  Of course, this is subject to any comments from other Fed officials, and things remain on edge regardless.  I didn’t mention the yields on peripheral European bonds, with Spain above 5%, Portugal near 7% and asking about the ECB’s willingness to actually use the OMT.  Remember, too, we have the EU meeting in Brussels on Thursday to try to hammer out the details of who is going to be on the hook for any necessary capital infusions into European banks if they should arise under the mooted bank regulator.  In other words, there are plenty of things around which can cause a market dislocation, I just have a feeling that today will be without much drama.  Take advantage of the quiet to establish hedges here.  It is much easier on a quiet day than on one where the s*it hits the fan.

Good luck