Friday, June 14, 2013
Stocks may not be able to follow through on Thursday's strong
performance in today's session, even though overnight trading
action out of Japan and Europe is generally on the positive side.
The market's Fed-centric worldview is shifting on a day-to-day
basis; it was positive on Thursday despite the stronger Retail
Sales report, but it seems less certain today ahead of the
weekend and next week's all-important FOMC meeting.
On the data front, the wholesale inflation reading was largely
uneventful, with some energy-related jump in the 'headline' but a
fairly muted 'core'. Industrial Production and University of
Michigan Consumer Sentiment are coming out a little later, but
everything revolves around the Fed at this stage which meets next
week and could potentiallly provide a lot more visibility about
its future course of action.
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The Thursday afternoon article by the Wall Street Journal's Jon
Hilsenrath, generally considered in the know about Fed policy,
appeared to ease some of the 'Taper'-centric concerns and likely
played a leading role in pushing the markets even higher towards
the close. But the article itself didn't break any new ground or
contain any fresh information. All it said was that Bernanke will
use his press event next Wednesday following the FOMC meeting to
reassure the markets that the Fed remained committed to keeping
interest rates low for a long time.
We knew that already. The markets know that tapering the QE
program doesn't mean an end to the QE program and that the Fed
was a long way off from raising the Fed Funds rate. But markets
tend to look ahead and start reflecting those future end points.
The roughly 50 basis points jump in the 10-Year Treasury bond
yields over the last few weeks is a reflection of the bond market
pricing those future Fed actions. Bernanke's assurances next week
will be useful, but the Fed doesn't have a lot of influence over
the longer end of the yield curve beyond the QE program.
All of the hand-wringing about the QE program aside, the fact is
that the Fed will start tapering only if it feels that the
economy was on a strong and sustainable footing. Higher interest
rates are no doubt problematic for stocks, but that is more than
offset by a growing economy and the associated improved earnings.
As such, a change in Fed policy would be a far more reassuring
signal about the health of the economy. And everything in the end
revolves around the economy.
Director of Research