Surprise! No Tapering and More Budget Progress than Meets the Eye

  • Surprise!
  • Before the Fed announcement: a batch of pretty solid economic reports
  • After the Fed announcement: still more solid economic reports
  • More progress on the budget than meets the eye of the T.V. networks
  • Fed watch: speeches galore


On Monday, Larry Summers exited the pool of candidates for the next Federal Reserve (Fed) chairman. (Only the timing was really a surprise.) On Wednesday, the Fed didn’t taper and de-emphasized several of the targets they’d set earlier. (Big surprise versus consensus - not central bank best practices). Municipal bond offerings by Puerto Rico, California, and Illinois were met with strong investor demand.

Last week in the capital markets: printing money boosts the prices of financial assets

  • Bonds: The 10-year Treasury yield fell 16 basis points to 2.74%, the 10-year Treasury Inflation Protected yield fell 28 bps to 0.52%; high yield bond were largely unchanged.
  • Equities: The regional MSCI indices were again up strongly: Japan gained 3% and led, Emerging Markets, Europe, and the S&P 500 each returned 1-2%. Most of the S&P 500’s gain came before the Fed announcement. Within the S&P 500’s sectors, Consumer Discretionary and Industrials led returns, while Energy lagged (lower oil prices).
  • Currencies: The Euro was up roughly 4% against the dollar and Yen, with the bulk of the move coming just after the Fed’s announcement. Most Emerging market currencies rallied.
  • Commodities: Oil was down 3% (lower war risk trumping inflation fears?); gold was up 2%.

Before The Fed’s Announcement: A Batch of Pretty Solid Economic Reports

  • Three economic indicators rose, less than expected, but still consistent with continuing modest growth: Industrial Production, Capacity Utilization, and the New York Fed (Empire) Index, which measure business activity in New York State.
  • While the Fed’s actions may lead to inflation in the future, today inflation is tame: year-over-year headline inflation (including gas and food) was 1.5%; core inflation) excluding gas and food) was 1.8%.
  • Gasoline prices slid to their lowest level since December (positive for consumers).

After The Fed’s Announcement: Still More Solid Economic Reports

  • Initial unemployment claims were 309k—well below expectations. Perhaps even more surprising, last week’s number (which the government had told us was garbage in because of computer issues in California and Nevada), was revised up by only 2k to 294k. There may still be a “garbage in” problem, but it sure looks like claims are still trending down.
  • The current account deficit – which measures how much the government spends vs. what it takes in ticked down to 2.4% of GDP in the second quarter.
  • The LEI (index of leading economic indicators) surprised to the upside.
  • The Philadelphia (mid-Atlantic) Fed business conditions index was very strong.

More Progress on the Budget Than Meets the Eye of the T.V. Networks

  • The House passed a continuing resolution funding the government (ex-Obamacare) through mid-December. This is progress. Really. Ignore the hysteria.
  • I believe the bill will never get enacted as-is, but the final deal—assuming there is one—will probably be an amended version of this bill.
  • The challenge was to get a first draft out the door, not to finalize the deal.
  • Now that the first draft is out there, the Senate can amend the bill (e.g. by adding funding for Obamacare) and send it back.
  • After some more negotiations, centrist Democrats and Republicans in both the House and Senate might/could/should join together to pass it over the objection of their parties’ outer wings.

Fed Watch: Speeches Galore

  • There are nine (9) speeches by Fed officials next week.
  • Next Federal Open Market Committee meetings: October 29-30 and December 17-18.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg.

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