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Accelerating Taper? No Better Time Than The Present

Tyler Durden's picture




 

Via Scotiabank's Guy Haselmann,

The market is highly confident that it has a good handle on tomorrow’s FOMC meeting, despite the fact that several factors will require modification.  There is high conviction that the Fed will not surprise the market, but rather take a “steady as she goes” approach that delivers a market consensus outcome.  The reasons for this view are obvious and logical; however, such complacency breeds risk as well as opportunity, because the arguments for accelerating tapering to $15 billion (per month) are quite compelling (as I outlined in my note on June 10th).

Interestingly, a consensus result still has traders debating how markets will respond and which variables are the most important.  Part of the problem is the mixed messages and cross-currents being delivered by the FOMC.  For example, the FOMC is talking uber-dovishly with forward guidance, while simultaneously reducing accommodation via ending the QE program.  Its words are dovish, but its actions are not.   In addition, the central tendency forecasts for GDP and the unemployment rate for 2014 will both be lowered.  The first is dovish, but the other is not.  Market confusion remains high, because Fed communication is poor and these factors provide ‘something for everyone’.  

The most tradable and talked-about unforeseen change is likely to come from variations made to the ‘dot plot’.   There are two sets of ‘dots’.  The first set is derived from each FOMC member’s prediction for the optimal ‘target federal funds rate at year-end’ for 2014, 2015, and 2016.  Tomorrow, there will be 19 dots with three new members voting:  Governor Fischer and Brainard, and new Cleveland Fed President Mester.  This dot set is likely to be consistent with forward guidance ‘promises’ and their emphasis on being ‘gradual’.

The second ‘dot’ set is the expectation for the appropriate ‘longer-run’ or ‘normal’ federal funds level.  Recent assessments have maintained this level near 4%.  It seems inconsistent that the FOMC is forecasting full-employment and 2% inflation for 2016, yet its median federal funds target for year-end 2016 is 2.25%.  If the dual mandates have achieved their optimal objectives, then why isn’t the FOMC’s 2016 target equal to the longer-run target of 4%?  Does this mean that the longer-run target could slip tomorrow to 3% or lower?

The Fed has said repeatedly that it is “not on a preset course” and that it is “data dependent”.   Based on this mantra, investors should not be so entrenched or wildly surprised if the Fed accelerated tapering to $15 billion.  When I outlined these arguments last week, many responded with entrenched comments such as ‘you’re crazy’, or ‘the Fed will never change course’.

The timing to accelerate QE reductions to $15 billion is ideal.  There are benefits to reminding markets that the Fed is truly ‘not on a preset course’.  It is always better for markets, and the Fed’s long run credibility, when investors know that it has flexibility and is adaptable.  Moreover, the data has certainly been better lately, therefore the move would indicate confidence to the market that the economy is gaining momentum and has healed adequately.

In addition, the new ‘dot plots’ would also partially offset the market’s reaction of ending QE sooner.  In other words, accelerated tapering would cause markets to price in an earlier first tightening (in Q1 2015 rather than Q2 2015), because the market believes such will occur 6 months after the end of QE (which would imply August vs. October).  Therefore, the new ‘dots’ are likely to show a Fed that is intent on raising rates only gradually and cautiously; thus, partially muting the reaction of QE ending sooner.

Exiting from QE by the end of the summer would also increase FOMC flexibility by freeing up the September FOMC meeting.  Additionally, the Fed could use the July Humphrey Hawkins testimony and the August Jackson Hole meeting to fine-tune policy.  Other reasons include: global rates and credit spreads near historical lows; equity markets at all-time highs; and the economy showing advancing signs of improvement.  Since the risks of financial stability and froth expand past economic benefits with each passing day, the Fed should be incentivized to exit QE ASAP.

A market note discussed this morning stated that the S&P 500 has gone 40 straight trading days without having a 1% move on a closing basis; the longest since 1995.  There have been only three instances since 1980.  This is likely the result of six consecutive years of extreme Fed policy motivating one-way moral-hazard risk-seeking trades.  If the FOMC is not aware of this and worried, it should be.  

If the market and our $17 trillion economy can’t handle the Fed buying $5 billion fewer securities next month, then we are all in big trouble.  Time presently works against the Fed.  Geo-political tensions could morph dangerously at any time.  Global economic cracks could also arise quickly from policy maneuvers in China, Japan or elsewhere. Hence, tomorrow’s meeting provides a great opportunity for the Fed to move the calendar more in its favor.

“Don’t think there are no crocodiles because the water is calm” – Malay Proverb
 
Regardless of whether the FOMC decides on a consensus outcome or a speed-up in the pace of tapering, I still like owning the back end of the Treasury market outright and opportunistically trading into and out of a flattener --- Covering front end shorts when the market prices too many hikes too early in advance .   (I still believe 30’s will breach 3.00% and the 5’s/30’s curve will move below 100 bps.)

 

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Tue, 06/17/2014 - 17:25 | 4866819 TeamDepends
TeamDepends's picture

The Paper Taper Caper:  Death Of A Nation

Tue, 06/17/2014 - 17:33 | 4866852 Goldilocks
Goldilocks's picture

Red Skelton - One Nation Under God - Pledge of Allegiance
http://www.youtube.com/watch?v=uuDcHWXUFjw (4:19)

Tue, 06/17/2014 - 17:57 | 4866950 Boris Alatovkrap
Boris Alatovkrap's picture

Taper now is fix nothing. Central Bank around globe is already confiscate wealth of nations by dilution of wealth (print of money). Crime of Century is complete. Taper now and is only hurt people by force bankster class for chasing of hard asset. Ironic to all is taper now = inflation.

Tue, 06/17/2014 - 18:07 | 4866994 Goldilocks
Goldilocks's picture

Federal Reserve = Crime of the Century
http://www.youtube.com/watch?v=NNgs36HIvqM (5:27)

Tue, 06/17/2014 - 19:34 | 4867255 Boris Alatovkrap
Boris Alatovkrap's picture

Crisis? What is Crisis?

Tue, 06/17/2014 - 23:18 | 4867803 Harlequin001
Harlequin001's picture

As long as Belgium keeps buying the Fed can keep tapering...

Oh, hang on, could there possibly be a link there... Nahh...

Everything's recovering nicely...

Tue, 06/17/2014 - 18:39 | 4867103 ejmoosa
ejmoosa's picture

Tapering now is like flushing the john when there's no water in the tank...

Tue, 06/17/2014 - 19:07 | 4867175 asteroids
asteroids's picture

The bankster have GOT to get out of the stawk markets. By purchasing a significant amount of stock, you are now directly linked to the shitty biz behind the stock. Now imagine for whatever reason, every fucking listed company decided to do a 3:1 split. What do you think would happen? Think it through....

Tue, 06/17/2014 - 17:42 | 4866896 Cattender
Cattender's picture

Best Fucking Economy i have EVER seen! Cut that Shit down to NOTHING!!!!! LOL...

Tue, 06/17/2014 - 17:47 | 4866916 TeamDepends
TeamDepends's picture

Hell, yeah!  We are enjoying feral cat tonight- ooh, uh, scratch that, dagnabbit- don't print tha

Tue, 06/17/2014 - 18:58 | 4867147 TheReplacement
TheReplacement's picture

It wasn't actually feral was it?

Tue, 06/17/2014 - 19:17 | 4867200 ThroxxOfVron
ThroxxOfVron's picture

So YOU'RE the one why cut the kitchen screen door and made of with him when I was busy watching porn, er, reading ZeroHedge !

Asshole.  

-& I'd been fattening that mean little rodent for over a month now on road-kill I collected at night having promised my mother-in-law a BBQ for her birthday.

Tue, 06/17/2014 - 17:27 | 4866830 teslaberry
teslaberry's picture

TAPER doesn't matter when behind the scenes the fed and every other central bank are buying all the blue chip stock . 

 

taper could argu=ably accelerate with the stock market going up in price. the end game cometh.

Tue, 06/17/2014 - 17:30 | 4866834 NOTaREALmerican
NOTaREALmerican's picture

As long as the smart-n-savvy people are protected, everything is good.

Tue, 06/17/2014 - 17:32 | 4866845 Ban KKiller
Ban KKiller's picture

And what will the PIGS at the trough say? Oink, where is the free money, oink!

Fuck you FED, FIG and all the banksters. Yeah, that really hurts, eh?

Hey sucmfuck attorneys who work for banks...what are you thinking? Do you need work so bad that you work for corrupt, evil shysters? What? You LIKE them? Oh, that makes sense...well then, fuck you too. 

Tue, 06/17/2014 - 17:32 | 4866847 huggy_in_london
huggy_in_london's picture

Tapering by $15bn tomorrow would certainly dovetail in nicely with their concerns about the market not being volatile and being complacent. 

These "better growth numbers" ... please... can someone tell me where these are cause quite frankly I havent seen the balance shift to "better outlook"

Tue, 06/17/2014 - 17:40 | 4866890 Winston Churchill
Winston Churchill's picture

April and May numbers are in the shitter. for retail and housing.

They will have to add govt. bullshit to GDP to come out positive for Q2.

Hookers and drugs will not be enough.

 

Tue, 06/17/2014 - 17:44 | 4866904 JohnG
JohnG's picture

I'll do my part.  Increase drinking to ludicrous volume and hire another hooker....it's for the children after all.

Tue, 06/17/2014 - 18:20 | 4867040 stocktivity
stocktivity's picture

No way will "Ole Yellen" rock the markets this soon in her tenure. Staus quo...Rally on...It's all Bullshit!!!

Wed, 06/18/2014 - 07:10 | 4868338 DavidC
DavidC's picture

huggy_in_london,
You're right.

"If the market and our $17 trillion economy can’t handle the Fed buying $5 billion fewer securities next month, then we are all in big trouble. "

The market CAN'T handle the Fed buying $5bn fewer securities next month. We ARE in trouble. The Fed (and BoE and ECB and BoJ) CANNOT allow rates to move given the all-in leverage they all have, and increasing tapering will have an effect on rates. This can not and will not continue.

DavidC

Tue, 06/17/2014 - 17:34 | 4866858 Carl LaFong
Carl LaFong's picture

The FED can only accelerate "tapering" by $5 billion / mo is if they can convince "Belgium" to buy an additonal $5 billion / mo in treasuries. Oh, wait a minute, they are "Belgium"...

Tue, 06/17/2014 - 17:38 | 4866883 Tall Tom
Tall Tom's picture

Your post beat me by a minute.

 

I cannot believe that anybody here is actually serious when discussing a taper that is not happening.

Tue, 06/17/2014 - 19:19 | 4867209 ThroxxOfVron
ThroxxOfVron's picture

Taper?

& I thought that We were a few weeks away from declaring a brand new recession requiring some kind of STIMULUS program to create or save a few thousand email deleting bureaucrats and GM labor union boozers from being outsourced?

Tue, 06/17/2014 - 17:35 | 4866867 Tall Tom
Tall Tom's picture

THERE HAS BEEN NO TAPER. IT IS FAKE.

 

REMEMBER BELGIUM???

Tue, 06/17/2014 - 17:57 | 4866952 Soul Glow
Soul Glow's picture

Belgium is Russia moving assets to not get hit by sanctions.

Tue, 06/17/2014 - 17:38 | 4866878 vote_libertaria...
vote_libertarian_party's picture

supply and demand people

 

when demand drops and supply does not (in this case, continues to grow) prices go DOWN

 

Now the Belgium is not part of that equation...

Tue, 06/17/2014 - 17:41 | 4866893 TVP
TVP's picture

"Taper" is nothing but talk.

The BRICS nations are beginning to dump US treasuries by the billions. Funding their own bank, about $100 billion I believe, did ya hear about that one????

 Belgium cannot be a backstop forever. 

The Yellenturtle shall increase QE, up to $100 billion per month, at least.

Maybe not tomorrow, but at some point, that's the ONLY possible way to keep this ponzi running.  Hyperdrive super light speed muthafucka on the digital fiat printing presses.  

Tue, 06/17/2014 - 17:42 | 4866895 hairball48
hairball48's picture

Bonnie here makes more sense than anything coming out of the mouths of the FOMC members, or for that matter, any of those fucks at the Fed...

https://www.youtube.com/watch?v=HQFAq063aPM

Tue, 06/17/2014 - 17:45 | 4866902 Xibalba
Xibalba's picture

"Only a whitey would take 10" from the bottom of a rug, add it to the top, and call it a taper."  - Native American Proverb

Tue, 06/17/2014 - 17:44 | 4866903 crazytechnician
crazytechnician's picture

You cannot taper a Ponzi Scheme.

Tue, 06/17/2014 - 17:49 | 4866924 Rainman
Rainman's picture

+1 for wisdom

Tue, 06/17/2014 - 17:54 | 4866937 NoTTD
NoTTD's picture

Glad to see I've moved to headline picture status.

Tue, 06/17/2014 - 17:56 | 4866946 Soul Glow
Soul Glow's picture

The Fed is exiting to set up another collapse in which they will once again save us from ourselves.

Tue, 06/17/2014 - 18:38 | 4867100 yogibear
yogibear's picture

Taper talk is nothing but BS.

Tue, 06/17/2014 - 18:00 | 4866970 Dingleberry
Dingleberry's picture

What about those pesky Belgians?

They gonna taper too?

Tue, 06/17/2014 - 18:05 | 4866979 GooseShtepping Moron
GooseShtepping Moron's picture

It wouldn't surprise me at all if Janet accelerated the taper, and I also believe rates will be rising soon. It's not about pumping stocks anymore, it's about strengthening the dollar. With Europe going NIRP and considerable geopolitical upward pressure on oil prices, a strong dollar is the best policy and would bring a relative windfall to the US economy. Don't expect stocks to correct, however; expect them to trade sideways on very low volume. The VIX has it right.

There is a seed of courage in the heart of every hobbit, Mrs. Yellen not excepted.

Tue, 06/17/2014 - 18:13 | 4867011 Goldilocks
Goldilocks's picture

Re: Mr. Yellen

Gollum
http://www.youtube.com/watch?v=DLvIFRNbqOs (2:23)

Tue, 06/17/2014 - 18:37 | 4867096 yogibear
yogibear's picture

Fed is saying it wants massive inflation. The federal Reserve will continue to flood with more and more dollars until they trigger hyperinflation.

Back door buying of US treauries,

Tue, 06/17/2014 - 18:41 | 4867106 earleflorida
earleflorida's picture

soon the fed will be making real money-- lots of it...'

i do hope that the UST gets it's fair share?

Tue, 06/17/2014 - 18:50 | 4867123 Last of the Mid...
Last of the Middle Class's picture

they have to untaper the taper of the taper now in order to bring under control the non-inflation inflation. Just like they won't send troops to iraq, inflation is under control and the recovery is doing fine. And this my dear is extremely closely aligned with similar comments such as, I'll only stick the head of it in, This is my first time, and I love you. Get it?

Tue, 06/17/2014 - 18:56 | 4867143 I Write Code
I Write Code's picture

They may trim the tapir another $5b or so to prevent a repeat of the market squeeze they saw last week, and in fact maybe they *already* did the trim, like who can tell?

Tue, 06/17/2014 - 18:59 | 4867153 Bosch
Bosch's picture

If they are going to directly invest in equities anyway, who cares?

Tue, 06/17/2014 - 19:30 | 4867246 Hohum
Hohum's picture

The day is not far off where the price of oil (WTI) is less than the marginal cost to extract.  Then what the Fed does will be irrelevant.

Tue, 06/17/2014 - 20:17 | 4867371 honestann
honestann's picture

The short term "emergency" response was to "just print and buy US bonds the obvious way"... because that's quick and obvious, and intended to be seen and have emotional impact.

The medium term "emergency" response is now to pretend a recovery exists, support that by cutting back the size of the above the table QE, but actually increase the total fiat printing and buying spree by less visible and invisible means (transfer money to foreign entities, who then buy the bonds and stocks the federal reserve specifies).

The longer term plan is to keep interest rates at zero (because the large governments literally cannot afford market interest rates at this point... see Japan for best example), and try to push the date of hyperinflation as far out as possible by propaganda, by invisible financial schemes, regulations and whatever nonsense large numbers of morons will believe.

Tue, 06/17/2014 - 22:10 | 4867633 BobTheSlob
BobTheSlob's picture

And you, Honestann, get the ZH prize of the night for the only intelligent response of the evening.

THis pretty much sums it up completely...without all of the typical ZH conspiracy theory stupidity.

Wed, 06/18/2014 - 03:16 | 4868150 damicol
damicol's picture

I don't think I have read such unmitigated shite for a long time.

 

 Joining the dots .

 It's like visiting an asylum every month and charting the responses of the fucking brain dead inmates to questions on  quantum chromodynamics and  then reading fucking tealeaves.

There is no fucking taper, there can be no taper, it is a fucking PONZI scheme.

98 billion just went out the back door to the fucking banks you fucking knuckehead

Ask Mr Madeoff for an informed opinion.

 You are fucking clueless

 

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