Macro Wrap – And Now We Enter the FedSpeak Coliseum

by Enis August 21, 2013 7:52 am • Commentary

In case you’re our lonely reader from Botswana (and we do apparently have one), the FOMC minutes will be released today at 2pm.  The whole market has been eyeing today for the past week.  But it’s just the kickoff event for a month filled with Fed related speculation, not just related to the Taper / No Taper debate, but also the new Fed chairman discussion, as well as many further reports about the changing carousel of Fed governors for 2014 (here is a good summary of the carousel).

On the first point about the taper, the FOMC minutes today are likely to be as equally vague as the actual Fed release was on July 31st.  So the reaction to the minutes should be a better tell on positioning rather than the actual “takeaway” from the minutes.  In the back half of the week, we will also have more central bank commentary at Jackson Hole, though since Bernanke is not attending, that gathering does not have its usual gusto.

More important for the taper will be the release of the payrolls and manufacturing data at the start of September, which will be the last data points the Fed will see before its September 18th decision and Bernanke’s subsequent press conference.  I’m surprised that Fed governors continue to emphasize the need to see that data set when it’s only one month’s worth of highly unreliable data, but I imagine it’s part of their method of keeping the market in the dark.  In reality, I think it just makes everyone more spastic around volatile, oft-revised economic data points.

Most interesting to me as we enter the central bank coliseum over the next month is that interest rates are still higher than they were even in June and July, when the Fed was trying to talk them back down after the cat jumped out of the bag on Bernanke’s tapering comments in May.  The 2.50% level was breached on the 10 year, and the yield made a new 2 year high this week:

10 year U.S. Treasury yield, Courtesy of Bloomberg
10 year U.S. Treasury yield, Courtesy of Bloomberg

At the end of the day, the key transmission mechanism for QE has been low interest rates.  In that sense, if rates remain high in the coming weeks and months, no matter what the Fed does, then an implicit market tightening has already occurred.  So far, risky assets have weathered that tightening quite well.  The stock market’s future direction rests on whether that strength is just a case of delayed reactions, or an appreciation for genuine economic improvement