Taper May Not Mean the End of QE, But...
Stocks may not be able to follow through on Thursday’s strong performance in today’s session, even though overnight trading action out of Japan and Europe is generally on the positive side. The market's Fed-centric worldview is shifting on a day-to-day basis; it was positive on Thursday despite the stronger Retail Sales report, but it seems less certain today ahead of the weekend and next week's all-important FOMC meeting.
On the data front, the wholesale inflation reading was largely uneventful, with some energy-related jump in the ‘headline’ but a fairly muted ‘core’. Industrial Production and University of Michigan Consumer Sentiment are coming out a little later, but everything revolves around the Fed at this stage which meets next week and could potentially provide a lot more visibility about its future course of action.
The Thursday afternoon article by the Wall Street Journal’s Jon Hilsenrath, generally considered in the know about Fed policy, appeared to ease some of the ‘Taper’-centric concerns and likely played a leading role in pushing the markets even higher towards the close. But the article itself didn’t break any new ground or contain any fresh information. All it said was that Bernanke will use his press event next Wednesday following the FOMC meeting to reassure the markets that the Fed remained committed to keeping interest rates low for a long time.
We knew that already. The markets know that tapering the QE program doesn’t mean an end to the QE program and that the Fed was a long way off from raising the Fed Funds rate. But markets tend to look ahead and start reflecting those future end points. The roughly 50 basis points jump in the 10-Year Treasury bond yields over the last few weeks is a reflection of the bond market pricing those future Fed actions. Bernanke’s assurances next week will be useful, but the Fed doesn’t have a lot of influence over the longer end of the yield curve beyond the QE program.
All of the hand-wringing about the QE program aside, the fact is that the Fed will start tapering only if it feels that the economy was on a strong and sustainable footing. Higher interest rates are no doubt problematic for stocks, but that is more than offset by a growing economy and the associated improved earnings. As such, a change in Fed policy would be a far more reassuring signal about the health of the economy. And everything in the end revolves around the economy.
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