Photo: Flickr via Andres Rueda
From BTIG’s Mike O’Rourke, who reads the latest Fed tea leaves:Today, Dallas Fed President Richard Fisher, one of the new voting hawks, said that he will not support any further QE expansion beyond the current $600 Billion Treasury buying program which is set to expire in June. We view Philly Fed President Charles Plosser as equally, if not more hawkish than Fisher. We expect him to express similar sentiments. As we noted, markets like to see balance. Markets want to see the FOMC recognise the improvements in the economy since the program commenced. It is not a reversal of policy that is necessary, just a sign that the Central Bank is anchored in the same reality in which the market is. Otherwise, the speculative forces go haywire; some would say they already have. We believe that is the case only in select areas, not Equities. All one needs to do is watch Chairman Greenspan’s defence of the last 5 years of his service and one gets an idea of this disconnect. The key battlefield personifying this debate is the 10 Year Treasury yield, which tested the 3.70% level today. The yield is approximately the same level it was a year ago. While we are not in the correction camp, we suspect the Equity market will run into some headwinds. Either the Fed talk will start noting that the pedal needs to come off the accelerator, or the 10 Year Yield will start asking it to do so. The Fed slowing and stopping QE and a 4% 10 Year is not enough to dissuade us from owning Equities, but it is enough to create some bumps in the road.