"We have got to turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place, we have got to build a housing system that’s durable and fair and rewards responsibility for generations to come. That is what we have got to do."
- Barack Obama, August 6, 2013
BOTTOM LINE: The FOMC unexpectedly decided not to taper the rate of its asset purchases at today's meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin.
It seems the Fed is so scared about something (despite every long-only asset manager telling us day after day that the economy is recovering and the US doesn't need crisis support... oh and can withstand higher rates) that they have gone against consensus and decided that Tapering now is premature:
*FED REFRAINS FROM QE TAPER, KEEPS MONTHLY BUYING AT $85 BLN
*FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH
*FED: `TIGHTENING OF FINANCIAL CONDITIONS' COULD SLOW GROWTH
*MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015
Pre-FOMC: S&P Futs 1696, VIX , 10Y 2.865%, MTG Spread 72.5bps, USD 81.00, WTI $107.00, Gold $1310
With the Taper now off the table, and with the next earliest probable discussion of a Taper at the December FOMC meeting if then even, Bernanke - who may now stay have no choice but to stay for a third term - has decided to reflate the bubble to end all bubbles, along the lines of what we speculated may be the case in "Bernanke's Helicopter Is Warming Up", it is worth refreshing what Bernanke Asset Management's year end stock market target is. As a reminder, back in April we highlighted that in a world of central planning the only relevant thing to risk assets is the size of the Fed's balance sheet, and since there will be no change in the rate of ascent, we can once again repost what we showed nearly 6 months ago as to where the Fed believes the fair value of the S&P500 should be. The answer: 1,950 or bust.
Beginning 3 minutes before the release of the FOMC Statement, gold spot and futures prices began to rise notably. Bonds did not. Stocks did not. FX did not. Around 4300 contracts changed hands in the Dec Futures - massively more than average volume - before the statement came out and drove prices further up. In those 3 minutes Gold prices jumped $11... so the question is - lucky guess... or which big bullion bank got the nod?
We hope everyone is enjpying the spoils of war from reading the FOMC statement and buying appropriately. Of course, as Nanex shows, unless your trigger finger hit that big green button within a millisecond or so, you missed the entire move...
For now, markets are holding on to gains (in bonds, stocks, and gold) as we prepare for Ben to explain just how bad things are... and answer the tough questions about the growth slowdown in 2016... Of Course, that doesn't matter:
DOW JONES INDUSTRIAL AVERAGE RISES TO ALL-TIME HIGH
*S&P 500 RISES TO RECORD HIGH AFTER FED STATEMENT
Seems like moar of the same is here to stay in the Yellen Fed but now we know that QE is not helping the real economy - how will they 'communicate' its effectiveness? We suppose that, for now, Stein's warning of 'froth' is just for the academics...
There is a modest rebound from knee-jerk levels but in general everything is moving how one would expect since the Fed chickened out... The USD is collapsing, Gold and stocks soaring, and 10Y yields tumbling... VIX and Bond vol has also collapsed. Let's just wait for Ben to bugger it all up with his communications...
Post-FOMC Reaction: S&P +17pts, 10Y -10bps, MTG spread unch, USD -0.65%, WTI +0.5%, Gold +$37
Judging by the market's reaction to the June FOMC statement and press-conference, Nanex shows the four things that US market participants can expect to happen over the next few hours:
- The HFT Machines Will Take Over (fake quotes will soar)
- Quote Spreads will Widen (but all that liquidity provision?)
- Quote Spreads will Become Unstable
- The Number of Stocks Locked (Bid=Ask) or crossed (Bid>Ask) Will Soar
But apart from that - do as you're told and BTFATH as every commission-taking muppet will tell you the Taper is priced in.
Whether or not it is an indication of potential legal troubles over Obama's horizon is unclear, but as Politico reports, the White House Counsel Kathryn Ruemmler, a Georgetown Law graduate who assumed office on June 30, 2011, "has told President Obama she plans to leave by the end of the year" and a search for her replacement has begun.
With the FOMC set to announce the decision to taper or not taper, forward guide or not forward guide, cut thresholds or not cut thresholds, we thought a reminder of the seven reasons to delay the taper (following what BAML's Ethan Harris calls the recent "punch in the stomach for the economic recovery story") and the four crucial reasons why the Fed can't (or won't) delay the Taper.
As we earlier noted, there are numerous reasons that a taper should not occur (despite the protestations of so many sell-side economists that the economy is recovering... or about to). The following chart perhaps sums up best just how bad the real situation is... In light of this - if Bernanke tapers, is it not clear that The Fed is admitting it is cornered (for the four reasons we explained previously).
This morning we heard from Russia's Lavrov claiming to be ready to send proof, that Assad was not responsible for the chemical weapons launch on Syrians, to the UN. It is, therefore, only appropriate that the opposition - in some way - respond. The Free Syrian Army's Al-Masry state by phone this morning that:
- *SYRIA SMUGGLED CHEMICAL WEAPONS OUT TO LEBANON: AL-MASRY
- *SYRIA SMUGGLED TWO SHIPMENTS OF CHEMICAL WEAPONS TO HEZBOLLAH
- *SYRIA OPPOSITION SAYS UN CHEMCIAL TEAM SHOULD VISIT LEBANON
So it would appear the 'Syrian deal' is all going well; the debt-ceiling debate is just starting to hot up; German elections are too close to call; and the Fed is about to step away from the punchbowl. BTFATH...