Today’s release of the FOMC minutes caused a market rethink about QE and it seems that the RALLY IN THE DOLLAR, SELLOFF IN PRECIOUS METALS AND FIXED INCOME MARKET means the market believes that the FED will restrain itself from another massive liquidity injection. The EQUITY market initially sold off by regained almost all of its losses by the close (NASDAQ ACTUALLY CLOSED HIGHER) as the STOCKS remain convinced that the FED WILL KEEP ZIRP FOR THE FULL EXTENDED PERIOD.
As I reread the minutes a third time, it doesn’t read HAWKISH and thus the outcome of today’s trading will mean that ALL FUTURE UNEMPLOYMENT RELEASES WILL BECOME THAT MUCH MORE SIGNIFICANT. WHY? AFTER CHAIRMAN BERNANKE’S SPEECH ON EMPLOYMENT LAST WEEK, BERNANKE’S POSITION WILL BE PARAMOUNT TO ANY SPEECHES BY THE OTHER FED GOVERNORS. Bernanke was adamant that until the structural/cyclical discussion on unemployment is resolved the FED will err on the side of growth.
Remember, the oft quoted ROGOFF/REINHART work says inflation of 3-5% will do much to lift the burden of deleveraging, which is the primary source of TEPID growth in a balance sheet recession world. Weak unemployment numbers, either NONFARM PAYROLLS or INCREASES IN THE UNEMPLOYMENT RATE will result in increased volatility after the way the markets chose to interpret today’s FOMC RELEASE.
Tomorrow’s ADP DATA is now more significant as the market is looking for a gain of 200,000 private sector jobs. The market is walking on edge as it tries to read the tea leaves on future FED actions. Beware, even if there is no QE the FED may well shout that it is extending the TWIST PROGRAM to insure against a rise in mortgage rates. Confusion REIGNS.
***Tomorrow the ECB will announce its interest rate decision and it is expected to hold rates steady at 1%. There will be a press conference following at 7:30 a.m. CST, but with election cycle in full swing and the EURO DEBT MARKETS RELATIVELY CALM, President Draghi is not expected to offer up any significant policy change. Let LTRO work and wait for the next shoe to drop after the FRENCH ELECTIONS.