Macro Wrap – FOMC Minutes and Tightening Chatter

by Enis April 10, 2013 8:07 am • Commentary

The FOMC minutes are released today at 2pm.  While few expect much change in stance from the Fed, that has been the case for the past couple releases, but the market has still reacted.  The most recent release was on February 20th, which was a relatively benign Minutes, but that was the catalyst for the deepest pullback we’ve seen so far in 2013, as the SPX index went from 1530 to 1485 in the days following.  Prior to that release was the December 26th release, which again led to a brief selloff in U.S. stocks.

When expectations are set to easing no matter what, any discussion about the end of easing gets market participants nervous.  The recent jobs report likely puts the fears of premature tightening to rest, but regardless, I expect traders to react to any signs of more hawkish commentary today simply because it’s been a one-way street of easing bias for so long.

Interestingly, Bernanke said on Monday that the primary tool for tightening would first be interest on excess reserves, rather than asset sales from the Fed’s balance sheet, as summarized by this brief Bloomberg article.  I don’t expect the Fed to begin such tightening for many months yet, but even the beginning of the conversation could elicit market responses.

In the short-term, the real monetary stimulus has come from the Japanese authorities.  But just as I write, Japanese officials are making statements indicating that they might have reached their short-term target for the yen (they previously stated that 100 in USD/JPY was “reasonable”).  The 1 year chart shows a very extended condition, and a long-standing momentum divergence (shown by my arrows comparing price to RSI momentum), and I expect a short-term pullback in USDJPY:

1 year daily chart of USD/JPY, Courtesy of Bloomberg
1 year daily chart of USD/JPY, Courtesy of Bloomberg

This might be the most important short-term barometer for global risk appetite for now.