MONDAY SCOUTING REPORT
This week, the Federal Reserve will be holding its regular Federal Open Market Committee (FOMC) meeting where it will update the world on the direction of its ultra-easy monetary policy.
This is without question the marquee event of the week, and the whole world will be watching.
After the meeting, the Fed will release its FOMC statement which will be followed by its updated economic forecasts. And that will be followed by a press conference with Fed Chairman Ben Bernanke.
Lately, investors have been speculating that the Fed could soon begin tightening its monetary policy, first by tapering its current bond-buying program. Some believe this is behind volatility in the markets where stocks have fallen, U.S. interest rates have rallied, and emerging market bonds have crumbled.
Traders and investors around the world will watch the Fed very closely and scrutinize every breath for clues as to if and when the Fed is considering tightening monetary policy.
- What will the Fed say? No one expects any change in monetary policy in the near-term. This includes keeping short-term interest rates near 0% through its open market operations and long-term interest rates low through its quantitative easing, or bond-buying, program. However, any change in tone particularly about the inflation and unemployment could help economists figure out when the Fed might make its next move.
- …Goldman Sachs’ Jan Hatzius: “While Chairman Bernanke is likely to reiterate in the post-statement press conference that the QE tapering decision is data dependent, we expect him to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee takes the first step in that direction.”
- …Morgan Stanley’s Vincent Reinhart: “However, do not be too surprised to see some movement in the dots depicting the desired fed funds rate year-by-year. Relative to the majority call that the first rate move is in 2015, one participant or so might pull the date of first tightening forward in light of the vigor to spending in the face of fiscal headwinds. On the flip side, one or two might shift to 2016 given that inflation, which is very inertial, has moved so far below the Fed’s 2 per cent goal. View the latter as a modest protest that market participants should not get too ahead of themselves in expecting tightening.”
- …Deutsche Bank’s Carl Riccadonna: “We do not expect Mr. Bernanke to yet show confidence that the time to taper QE is near, but the most important aspect of his media Q&A will be whether he signals that an H2 taper remains plausible. Of course, he could go one step further by signaling if it was likely given the Fed’s updated economic projections, but we expect he will refrain from being so explicit given lingering uncertainty over the near-term economic outlook.”
- NAHB Housing Market Index (Monday): Economists estimate homebuilder sentiment improved to 45 from 44 last month. “The recent rise in mortgage rates has probably held down builders’ optimism,” said High Frequency Economics’ Jim O’Sullivan.
- Consumer Price Index (Tuesday): Economists estimate that CPI climbed by 0.2% in May. “CPI is expected to rise 0.2% in May as gas prices flatten and the energy component sees a small uptick after a cumulative 7% plunge in the prior two months,” said Vincent Reinhart.
- Housing Starts (Tuesday): Economists estimate 952,000 starts in May. “Single-family construction has slowed over the past couple of months, after experiencing solid growth in 2012,” said Wells Fargo’s John Silvia. “However, tighter inventories suggest construction will pick up over the next year.”
- Existing Home Sales (Thursday): Economists estimate that existing home sales climbed 0.6% to 5.0 million in May. “Pending home sales and mortgage purchase applications saw decent upside in April and March and we look for that to continue in May,” noted Reinhart.
- Fed Manufacturing Surveys: Empire State (Monday) and Philadelphia (Thursday): Here’s Capital Economics’ Paul Ashworth and Paul Dales: “The Fed’s latest Beige Book suggests that economic activity is expanding at a “modest to moderate” pace. In particular, producers in the New York District reported “steady business activity”. Meanwhile, activity appears to have declined in Philadelphia. We have therefore pencilled in a rebound in both the Empire State and Philly Fed indices to zero and -2.0 in June, from -1.4 and -5.2 in May respectively.”
There seems to be little consensus on what’ll happen to stocks from now to the end of the year. But longer-term, the consensus seems to be that stocks will be heading up.
Deutsche Bank’s David Bianco recently said he expects the S&P 500 to hit 2,000 by 2015.
“Reduced recession risks and S&P EPS grinding higher despite macro challenges has increased investor confidence in EPS sustainability and shifted the debate from normalized EPS to normalized long-term interest rates,” he said. “Interest rates staying lower than history, even after the Fed stops purchases, as moderate growth persists making for an extended cycle, should drive the PE higher.”
In other words, all of this talk of tapering and tighter monetary policy may cause short-term volatility, but in the long-run it won’t slam stocks.
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