While the issue of whether they will or won't taper is certainly still not clear, the WSJ's John Hilsenrath notes that the other dilemma facing the Fed is whether to reduce their purchases of Treasurys, mortgage-backed securities or both. According to officials, Hilsenrath notes, there were two lines of thinking at the Fed on how to structure a pullback from the bond programs and the issue would be discussed at the meeting. Goldman's Jan Hatzius has posited that "Fed leadership probably views MBS purchases as more effective in boosting economic activity than Treasury purchases," but as Hilsenrath notes, some Fed officials prefer a simpler-to-communicate strategy of proportional cutbacks to both MBS and Treasuries. The fact that Hilsy is reporting this suggests that a Taper is somewhat inevitable - as we have noted since the Fed remains cornered. On average, the market expects a $6bn taper on Treasuries and $3 billion for MBS.
With bonds and stocks rallying (and the USD dropping) notably in the last few days, one could be forgiven for believing the Taper is off but Goldman's baseline forecast remains for a $10bn reduction in asset purchases - probably all in Treasuries - and $15bn is possible (though recently mixed labor data may choke that a little) and a strengthening of forward-guidance. As they note, the current redction in uncertainty (or rise in complacency some might say) has the potential to offset the tightening in financial conditions, barring another major outbreak of DC strife in the run up to the debt ceiling in late October/early November. However, what is most notable is Goldman's expectation that the Fed will start walking-back its unemployment-rate threshold as it has been clearly shown not to be a good catch-all indicator of broad economic and labor market performance. So it's data-dependent - but the data is unreliable at best and false at worst.
"While the August employment report was a moderate disappointment, we believe it is probably not weak enough to prevent the FOMC from tapering in September. However, it does raise the likelihood of a "dovish taper," which could include a small size of the overall adjustment to purchases, and which we think would likely coincide with an enhancement of the forward guidance."
While we found it modestly comedic (and certainly ironic) that CNBC's crack team celebrated the recovery from the initial knee-jerk drop in stocks after the FOMC by top-ticking that suspension of reality; we suspect the following post-mortem from Goldman on the minutes is what confirmed concerns across the street... "Minutes from the July 30-31 FOMC meeting were generally consistent with our view that tapering of asset purchases is likely to occur at the September meeting, coincident with an enhancement of the forward guidance."
As the disconnect between payroll data and GDP grows, and the schrodinger reality of a non-farm-payroll print and JOLTs data increases; it will not come as a total surprise to Zero Hedge readers that Goldman Sachs has finally been forced to admit that investors have been fooled by the relative importance of jobs data. While the payrolls data has the largest financial market effect of all economic indicators (by a large margin), Jan Hatzius finds that neither payrolls (or Advance GDP) provide any incremental information about the broad strength of the economy.
Back in late 2012, Goldman's Jan Hatzius did precisely what he did at the end of 2010: predicted that after many years of delays, the US economy would finally soar higher on the back of the reignition of the virtuous cycle driven by now endless Fed micromanagement of virtually every aspect of the economy. We mocked him in 2010 (6 months later he pulled his call following a series of embarrassing mea culpas), and did the same in 2012. So here we are, 8 months later, and this much-delayed recovery has been "delayed" again - just as we thought. Of course, once bitten by the fringe blogosphere, Jan is not willing to pull his recovery call for the second time in a row despite deteriorating GDP and employment data, and instead (like everyone else) if placing his faith with the Fed, despite five consecutive years of disappointment from St. Ben. Maybe this time it will be different... although it won't. In the meantime, from a glass fully full (which is where it was supposed to be by this time in the year), the Goldmanite has now reduced his economic assessment to half that.
One of the unpleasant side-effects for the Fed's forecasting (insert laughter here) abilities, is that following today's GDP revisions, H1 annualized GDP is now 1.4%. It means that there is no way that the economy can grow fast enough in the second half (especially with such early disappointments to the second half as the just released Chicago PMI miss) to meet the Fed's forecast growth of 2.3%-2.6%. Which, in turn, means more egg on the face of Bernanke and the FOMC's 2013 forecasts. Which is precisely what Goldman just said.
Until today, Goldman expected the Fed's tapering to start in December. Not any more: following today's better for part-time jobs than expected data, the squid has pulled its tapering prediction up to the September FOMC meeting: just what Zero Hedge said 2 months ago. But what just slapped ES across the face is the following from FRBNY's informal advisor Hatzius: "We now expect purchases to continue through Q2 2014 (vs. our prior forecast of Q3 2014), in line with the guidance given by Chairman Bernanke at the last FOMC press conference." That's ok Goldman, we are used to you being wrong. Speaking of, any more Stolper recos?
And now for something completely different. Citi's Willem Buiter is best known for his exhaustive, often times fatalistic outlook on Europe (he will ultimately be right about the Grexit, and Spexit, and ultimately Dexit, the only problem is so will Meredith Whitney about the state of the US municipals - eventually). It appears there may have been a reason for his dour outlook on life: a sexy stalker as it turns out. A sexy, but very demented stalker.
For all those unable to sleep tonight without the knowledge what Goldman thinks about this week's most important economic release, Friday's Nonfarm Payrolls number (and the unemployment rate, which is guaranteed to continue the previously observed divergence from GDP in a centrally-planned and completely "brokun Okun" environment), read on for your trivial Ambien. From Goldman "Our forecasts for the US dataset to be released this week will likely be mixed for rates... we think that payrolls will likely disappoint market expectations." As a reminder, consensus expectations are for a 165K print, declining from May's 175K, while Jan Hatzius now expects 150K. And with that the second great US renaissance which Hatzius forecast in late 2012 is being "tapered" away the same way his 4% GDP prediction in late 2010 devolved into sheer nothingness.
Extreme Developed Market (DM) monetary policy (read The Fed) has floated more than just US equity boats in the last few years. Foreign non-bank investors poured $1.1 trillion into Emerging Market (EM) debt between 2010 and 2012 as free money enabled massive carry trades and rehypothecation (with emerging Europe and Latam receiving the most flows and thus most vulnerable). Supply of cheap USD beget demand of EM (yieldy) debt which created a supply pull for EM corporate debt which is now causing major indigestion as the demand has almost instantly dried up due to Bernanke's promise to take the punchbowl away. From massive dislocations in USD- versus Peso-denominated Chilean bonds to spiking money-market rates in EM funds, the impact (and abruptness) of these colossal outflows has already hit ETFs and now there are signs that the carnage is leaking back into money-market funds (and implicitly that EM credit creation will crunch hurting growth) as their reaching for yield as European stress 'abated' brings back memories of breaking-the-buck and Lehman and as Goldman notes below, potentially "poses systemic risk to the financial system."
With 45 minutes left to go, only one thing matters: what does Goldman think (the other issue of whether Jan Hatzius shared a meal with Bill Dudley at the Pound and Pence will remain unknown until the next batch of Dudley daily "minutes" are released in a few months). So for all those scrambling for an edge in a centrally-planned world, here it is, via Goldman's Francesco Garzarelli : "Turning to today’s FOMC announcement and press conference, our US Economics team expect Chairman Bernanke to stick to the same message on ‘tapering’ of bond purchases used in previous pronouncements on the matter, but also emphasize that reducing the expansion of the balance sheet does not imply that the Fed is anywhere close to hiking rates. We think this is broadly what bondholders are also expecting to hear."
In the six weeks since the last FOMC meeting there has been almost uninterrupted relatively 'hawkish' chatter from Fed members. However, the consensus remains convinced there will be no 'Taper' anytime soon - as somewhat evidenced by the following summary of FOMC expectations from Goldman's Jan Hatzius. So the question is - if, based on the 'economy' there is a belief that no Taper will occur - why has the Fed been so 'hawkish'? We suspect, as we have noted numerous times, the decision to 'Taper' (or at least jawbone 'Tapering') is not economically data-driven but more a growing concern over technical impacts on the Treasury (fails and excess ownership) and mortgage (non-economic spreads crowding out private money and huge build in convexity) market and the bubble-like rational exuberance across every asset class that they have created.
The last time Hilsenrath tried to be relevant, back on May 22, he essentially said to ignore anyone who tried to time the Taper (but don't call it a Taper) when he said: "when the Fed shuts off bond buying, it won’t be abrupt and it won’t be predictable." So just to make sure market expectations of tapering are actually very predictable, if at least on the short end, moments ago Hilsenrath once again hit the tape with the following: "Fed Likely to Push Back on Market Expectations of Rate Increase: Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates. Investors aren’t listening." So here comes the Hilsenrally to save the day by making investors listen, even if not so much for the benefit of stocks this time, as for bonds, which little by little are starting to lose it.
Given that ALL of the stock market gains since 2008 were based on Fed money printing… what do you think will happen when the Fed tries to taper QE?