Wall Street economists and strategists are revising their views on the Federal Reserve’s most likely start date for tapering down its quantitative easing program in light of the
surprise delivered by the October FOMC policy statementreleased today.
Here’s what they are saying.
Kevin Cummins, UBS: Today’s statement also cut the reference to a “tightening in financial conditions observed in recent months”, a reference we had trouble squaring with reality unless “financial conditions” was simply code for “mortgage rates”. Presumably, officials are now happier with the recent decline in interest rates, especially mortgages. All in, there was nothing here to contradict our outlook for policy. With data likely to be muddied by collection difficulties, the first QE taper seems to be a question for Q1(14), with the Jan. 28-29 FOMC meeting somewhat more likely than the March 18-19 meeting. (Note: A January announcement would likely mean the start of tapering in March, as the Fed’s purchase schedule is announced in advance, so that the schedule for February purchases will likely exist by the Jan 30 Fed meeting.)
Michael Hanson, BofA Merrill Lynch: Like September, they decided to “await more evidence that progress will be sustained” before tapering. In light of the lack of a more dovish assessment, we maintain our flat distribution over the possible first taper date during the first half of 2014 — today’s statement does not rule out a January taper, for example. The market was clearly anticipating a long time before tapering began; hence today’s selloff. We caution that although the Fed did not taper in either September or October, the economic hurdle to get the Fed to scale back purchases modestly does not appear all that high.
Steven Englander, Citi: The statement did not change much from September and in absolute terms there was no hawkish bias. However the market had moved far beyond the reaction to the September non-tapering surprise to pricing in tapering beginning no early than March and ending in end-2014 or early 2015. To justify this pricing you needed far more aggressive language than the Fed delivered. If anything, they lowballed on the disappointing incoming numbers (except a brief nod to weaker housing) and continued to use September language that emphasised the medium term economic improvement. Hence a dovish and pessimistic market was confronted by a Fed looking at the bright side of life. If anything, with Beige Book having characterised growth as ‘modest to moderate’, the unadorned ‘moderate’ in the Statement comes across as confident.
Chris Rupkey, Bank of Tokyo-Mitsubishi UFJ: In September they tacked on a caveat to the diminished risks sentence saying tighter financial conditions, “higher mortgage rates,” if sustained, could slow the pace of improvement in the economy and labour market. That must mean something, that they dropped that warning. They must be somewhat more confident about the outlook. Net net, we are not going to buy in to the idea that the Fed will wait to taper until March or June next year. The economy is not going to go off the rails because of the uncertainty down in Washington. We have two more monthly employment reports before the December meeting and if even one is a 200K jobs number, we think they taper in December. Again, they dropped the reference to tighter financial market conditions, that’s got to mean something. They must be somewhat more confident about the outlook.
Aneta Markowska, Société Générale: Overall, the FOMC seems satisfied with recent progress, and is relieved that some of the risks have failed to materialise. The committee sees the underlying growth (ex fiscal restraint) as having strengthened gradually since the launch of QE. Their bias is clearly towards tapering, the only question is when. The Fed has once again decided to wait for more evidence that progress will be sustained before reducing the pace of asset purchases. We now see the March meeting as the most likely timeframe for the first tapering announcement. December is not out of the question, but with the October data distorted by the government shutdown, it is unlikely that the Fed will have enough clarity before year-end.
Jan Hatzius, Goldman Sachs: The October FOMC statement was just a bit more hawkish than expected. The FOMC’s overall assessment of the economy was only marginally changed in the face of recent events, tighter financial conditions were no longer listed as an explicit worry, and there was no shift in language to more directly indicate a later expected date of the first reduction in asset purchases.
Paul Ashworth, Capital Economics: The latest policy statement from the Fed today is remarkable for what it omits rather than includes. Despite the wall-to-wall coverage in the financial markets and media of the two-week Federal government shutdown, particularly what impact it had on the economy, and the new uncertainty over whether a second shutdown could be triggered early next year, the FOMC statement doesn’t make a single clear reference to it. Not one. It’s like the whole thing never happened. The only cryptic reference is to the “available data” when assessing the recent incoming economic data…But if officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn’t quite as out of the question as we had previously thought. We still think sometime early next year is the most likely outcome, but the balance of risks just shifted a little.
Kit Juckes, Société Générale: Fears about what happens as a result of higher bond yields have gone, but the housing market recovery has stalled. This is ‘dovish’ I suppose but I don’t suppose there is a single economist, strategist, journalist, trader or barman who expected anything less dovish. The market therefore, sees this is a slightly hawkish light and the DXY rebound continues…But honestly folks, this is the most dovish CB out there simply failing to surpass expectations. For choice I look for the dollar rebound to go a bit further, and long USD/CAD is my favourite way to express that, while receiving USD and EUR rates after a day of soft inflation numbers which will slowly filter down into folks’ rate expectations in the coming days.
Vincent Reinhart, Morgan Stanley: The October FOMC statement contained few meaningful changes. In a nod to higher mortgage rates, the Committee acknowledged softer data on housing but made no changes in its assessment of labour market conditions and made no mention of the potential economic fallout from the government shutdown. We think the Committee wanted to draw as little attention to itself while it awaits more data and a better outlook before taking the decision to taper asset purchases.
Andrew Wilkinson, Miller Tabak: The message from the Fed is that the economy remains on course for recovery and that it sees the downside risks to the outlook for the economy and the labour market as having diminished, on net, since last fall. The Fed is on hold, but the tone of the statement and the failure to bend on account of the government shutdown is very likely to bring forward the market’s timetable of tapering from March where we feel the pendulum has swung too far. It would seem the Fed’s approach is extremely balanced and that members are taking a level-headed view of the impact of interruptions to the economy. We believe that the central bank does not want to confuse the market by chopping and changing its view at a micro level. A bigger change might come for example should their be failure to agree on budget measures that would threaten further the ability of the government to remain open.
Michael Gapen, Barclays: The information contained in the October FOMC statement was in line with our expectation. The committee made few changes to the statement and appears willing to keep its options open at upcoming meetings. We were looking to see whether the committee preserved the language saying that it “decided to await more evidence that progress would be sustained before adjusting the pace of purchases.” In our view, keeping this statement suggests the Fed is closing in on a decision to taper, but has not seen sufficient evidence to trigger that move yet. A more dovish signal would have been to return to language in the July statement, which said that purchases could be adjusted up or down based on changes in the outlook for labour markets … Looking ahead, the October statement suggests that tapering at the December meeting remains a possibility, although we believe that it is unlikely data will take a sufficiently strong turn by then to justify a reduction in the pace of asset purchases … and maintain our view that the Fed will reduce the pace of asset purchases to $US70bn per month in March of next year.
George Goncalves, Nomura: We are perplexed why traders and the media are focusing on the first sentence in the third paragraph that addresses their views on the fiscal impact, which was basically a repeat. They continue to state that given “the extent of federal fiscal retrenchment over the past year” they are still viewing QE as a success and that due to their asset purchases it has resulted in improving economic activity and labour market conditions, which are consistent with a growing economy. Granted by leaving this point basically intact, the market believes they are trying to put a positive spin to their messaging, but can it last? … Bottom-line, the FOMC has not hit their rosy forecast marks “all year long” (well since GFC really) and got overly excited about the data in 1H13, which got them talking about tapering too early – Doh! They need to continue to sound optimistic, got it, but to taper they will still need the data to improve and DC’s fiscal fights to go away, which doesn’t seem likely in our view.
Markets are skittish any time Fed doesn’t validate that the “carry trade” is a-ok and that means pushing bond markets and 10s for example through 2.5% will require weak data & round 3 of fiscal fight; unfortunately, we think it’s coming.
Vincent Chaigneau, Société Générale: The FOMC delivered a huge surprise in September, and this time thought it’d be better to say as little new as possible. It noted slower housing trends, but fell short of sounding more dovish. This caused instant profit taking on UST longs and dollar shorts. 10yr yields snapped back to the 2.55% area from 2.47% after a solid $US29bn 7yr note auction. We doubt we’ll see much follow-through in the corrective UST sell-off just now. Many market players, perhaps too many, want to be short here. That may be the pain trade just now, in an environment where inflation continues to surprise to the downside and growth remains soft.
Michael Gregory, BMO Capital Markets: When will the Fed start slowing QE? Labour market performance remains the critical factor determining the timing and magnitude of tapering, performance that will be interpreted in the context of inflation trends and prospective GDP growth (the latter speaking to the sustainability of labour market and inflation performance). We know the FOMC was close in September, but were dissuaded primarily by the risks posed by fiscal uncertainties and the spike in mortgage rates. This must also mean that labour market performance through August was likely sufficient to start tapering. However, labour markets deteriorated in September and likely did so again in October (if ADP is any guide). The Fed will likely wait for the November and December results before concluding whether underlying labour market trends are at least similar to what was around in August. As such, we see the earliest Fed move to be in January.