STOCK MARKET – ACTION ALERT -BEAR-‘Turnaround Tuesday’ had its impact, albeit minor and the ‘Street’ is now holding its breath to hear the FOMC statement today. Also, Friday is Options Expiration. The caveat, regardless of news, is if the markets fail to hold last Thursday’s intraday lows, we could be going off the cliff. This doesn’t have to happen today, but it’s a zone you have to watch. More than likely the bulls will prevail here because it doesn’t make any strategic sense for the markets to sell-off this sharply ahead of Christmas. For one, it violates Bernanke’s (and likely Yellen’s) edict to target a higher stock market. Stay tuned.
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COMMENTARY:
Economic data was limited to just a handful of reports. November consumer prices were unchanged while the Briefing.com consensus expected an uptick of 0.1%. Core prices increased 0.2%, above the 0.1% increase expected by the Briefing.com consensus.
Separately, the current account deficit for the third quarter totaled $94.8 billion, which was narrower than the $101.0 billion deficit that had been broadly anticipated.
Lastly, the December NAHB Housing Market Index rose to 58 from 54 while the Briefing.com consensus expected the reading to tick up to 55.
Today, the weekly MBA Mortgage Index will be reported at 7:00 ET while November Building Permits and Housing Starts for September, October, and November will be released at 8:30 ET. The day’s data will be topped off with the much-anticipated 14:00 ET release of the FOMC policy directive.
Below here are some key reasons why the FOMC might decide, or not decide, to make a tapering announcement on Wednesday.
The case for tapering now:
The House has passed the budget agreement and signs point toward the Senate doing the same this week. That signals the likelihood of less fiscal disruption, and less fiscal restraint, out of Washington in 2014.
Labor market trends are certainly improving. Nonfarm payroll gains have been 200,000+ in three of the last four months and have averaged 191,000 per month over the prior 12 months versus 151,000 (includes revisions) when QE3 was launched in September 2012.
Markets have hung in reasonably well as the case for a taper has gotten stronger, giving the Fed some measure of confidence (and another window of tapering opportunity) that participants are ready for a taper predicated on improving economic activity.
- Moody’s notes high-yield spreads have hit a cycle low.
- The S&P 500 hit a new record high.
- After the strong November employment report, the fed funds futures market did not alter its view that the first rate hike will wait until July 2015.
- The 10-yr yield is down two basis points since the strong November employment report.
The next scheduled FOMC press conference isn’t until March. If a tapering announcement is made, the presumption is that the Fed chairman will want to explain it at a press conference (and the Fed chair may not want to wait until March given the improving data that could create financial market imbalances in the interim).
In the face of a declining budget deficit and an improving economy, there is growing uneasiness within the Fed about its balance sheet expansion. The case against tapering now:
Inflation rates remain well below the Fed’s target rate.
Real final sales, up 1.9% in Q3, remain relatively weak; and Q4 GDP is apt to be under 2.0% .
The framework for a budget agreement is in place, but nothing has been resolved yet on the debt ceiling.
There are reports that year-end liquidity issues will factor into a decision to hold off for now.
Once the tapering begins, the Fed runs a heightened risk of seeing its credibility get eroded if it has to increase its purchases again on account of weakening data. While recent data have been encouraging, the Fed will want to be more certain about the sustainability of the improvement.
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