Author Archive for: Tom 2

I remain skeptical of the “power” of forward guidance and think the switch away from QE to forward guidance as a primary policy tool only furthers the bearish case for bonds.  And, my skepticism is rooted in experience and observation.

Although the rise in the Dollar Index yesterday got a lot of press, the one currency that was stronger vs. the dollar yesterday was the British Pound, which saw a 0.8% rally vs. the greenback—and that’s something that shouldn’t be dismissed, because I believe that what’s happening with the Pound, the FTSE and UK Bonds, may provide us a “road map” of sorts for what will happen to the Dollar, Bonds and stocks, now that the Fed is switching to “forward guidance” as its primary policy tool.
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The Pieces Are In Place For the Next Liquidity Crisis in the Markets – Here’s Where It Could Start

The Expected Scenario:

- No tapering of QE in December, but a strong signal by the Committee that tapering of QE will happen in January or March.

- Tapering Logistics:  If asked about how tapering will work, the market expects to see an initial tapering of $10 billion-$15 billion, and the process to be linear (tapering the same amount each month or quarter, whichever they decide).  And, markets expect the first taper to be weighted toward Treasuries, while mortgage-backed securities are left alone (to help soften the blow on the mortgage market, although I’m not sure it’ll make much of a difference).

If this is what we get Thursday, don’t expect any significant, volatile reactions from the various asset classes, as again this is what’s priced in.  As far as how markets will trade beyond the immediate reaction, that’s a tough one to call.  We could either see a “sell the taper rumor/buy the taper news” reaction. Or we could see markets drop on the news, due as much to the calendar and the skittishness of money managers I’ve been talking about, given the gains so far this year.
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Bottom line is it’s a big week from a policy and real economy perspective.

SHY: The last few days have seen the short end of the curve sell of moderately as a December taper becomes a possibility. As long as the decline doesn’t accelerate materially, though, tapering won’t kill the rally in stocks.