MorningWord 8/22/13: Based on a quick perusal of the FOMC Minutes from their July 31st meeting released yesterday, it appears that those charged with keeping our economic ship afloat lack the visibility as it relates to the health of the economy to let it swim without water-wings. The WSJ’s John Hilsenrath had a very useful round-up of what he deemed to be the “Key Passages” from the release on their Real Time Economics Blog yesterday, here are his main headline take-aways, but click through to get his detailed thoughts:
FED STAFF A TAD MORE PESSIMISTIC ABOUT THE NEAR TERM ECONOMY, BUT STICKS TO ITS GUNS
FED OFFICIALS ALSO SHOWED SOME ANGST ON THE ECONOMY
FED OFFICIALS UNCONVINCED ABOUT LABOR MARKET IMPROVEMENTS
MIXED VIEWS ON LOW INFLATION
FED OFFICIALS THOUGHT THE MARKET HAD IT ABOUT RIGHT IN LATE JULY
MIXED VIEWS ON THE DAMAGE OF RATE BACKUP
NO CHANGE IN THE STANCE ON BOND BUYING
OFFICIALS DECIDED THEY HAD ALREADY SAID ENOUGH
CHANGES IN INTEREST RATE GUIDANCE ARE ON THE TABLE
OFFICIALS CONSIDERED PATIENCE IN UNWINDING BOND PROGRAM
While I am no economist, it appears that the Fed Staff did not garner a whole heck of a lot of confidence btwn the mid June and late July meeting that the economy was improving at a rate that would cause the Fed to act sooner than the rough outline by Chairman Bernanke in May/June to “take their foot” off of the QE pedal.
Any way you look at it though, the Bond market has made up its mind that the “Fed Put”is decaying, but like many pundits have recently suggested, there is no reason why bond yields and stocks could not rise together, if in fact the economic data was to turn and better support a tapering of bond buying. I guess one situation for holders of stocks to consider would be the scenario where the economy, particularly employment and housing, languish in the near-term and bonds see another flight to quality, while lower yields could cause stocks to look more attractive, my sense is that the potential stalling of already paltry corporate earnings growth would outweigh the relative value argument.
I am in the camp that equity investors may be in for a little pain no matter what the FOMC decides to do at their Sept 17/18th meeting, if they Taper and the yield on the 10 Year Treasury rips above 3% I could see stocks re-test the June lows, but if the Fed does not Taper because the economy is not ready for it, and yields stay bid then I think bad news equals bad news and stocks still re-test the June lows. We have very few trading longs (added XOM yesterday here), and continue to look for opportunities to short “themes” on rallies like WFM (here) and FXI (here) last week.