In a bow to acronym manufacturing, I placed the idea of TAPER ON, TAPER OFF (TOTO). We got a taper but it was offset by the Fed’s forward guidance on the unemployment threshold.In the FOMC statement the FED clearly said, “The Committee now anticipates, based on the assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well PAST THE TIME that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” The emphasis on the phrase PAST THE TIME is to highlight that the Fed will keep moving the threshold on what will constitute an acceptable level of employment, if not in words but in deeds.
Why is this important? On February 11, Janet Yellen delivered a speech at an AFL-CIO Conference, “A Painfully Slow Recovery for America’s Workers: Causes, Implications, and the Federal Reserve’s Response,” in which she stated that “… most FOMC participants continue to estimate that the longer-run normal unemployment rate lies in a range of 5.2 to 6 percent, and the Committee continues to believe an inflation rate of 2 percent [as measured by the annual change in the price index for personal consumption expenditures] is most consistent with the Federal Reserve’s dual mandate.” If Chairwoman Yellen holds to this philosophy the PAST THE TIME will be the prevailing position of the FOMC. The bias of FOMC policy will be overtly dovish as the Fed errs on the side of believing their policy can be an overwhelming positive for jobs. The erring on the side of job creation OUGHT to steepen the YIELD curves as we go forward when investors begin to comprehend the FED PUT is not just an equity market proposition.
The market’s initial reaction has not been further steepening of the yield curve, although it did steepen in the first hour after the FOMC statement, but today saw a huge flattening, especially the 5/30, which went to 221 basis points from 240.
The markets are in holiday mode and therefore moves can become very exaggerated. The huge yield curve move looks to be a massive profit taking but if the 5/30 closes tomorrow under today’s low I would be cautious that there is much more unwinding to come. The EQUITIES performed as expected as the Fed’s forward guidance trumped any tapering, but, as noted,the equity markets had already been selling off in the anticipation of a TAPER. The Fed shoveled the cards and made us believe we could find the KING but it was all slight of hand as we were left with the QUEEN.
***As Churchill famously said, “Russia is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. THAT KEY IS RUSSIAN NATIONAL INTEREST.” President Putin has been busy in his role as disruptor in chief. He has involved himself in the Ukranian polity by offering to fund the gaps in Ukraine’s finances by offering $15 billion to buy Ukranian of its bonds and maybe more in the future. This is to prop up the regime of President Yanukovich, who is under severe popular pressure after his government spurned offers to become closer with the European Union. Putin made it very clear that the short-term cash fix was dependent on Viktor Yanukovich remaining in power. The Russian leader knows that a Europe in financial crisis cannot meet the cash being provided by Moscow and is thus trying to do with money what cannot be done with tanks. Russian foreign aid financed by European energy imports is the ultimate irony. Lenin is laughing.
In a very effort to look the diplomat, President Putin hinted today that Mikhail Khodorkovsky, the previous head of Gazprom, would be pardoned and released from jail after serving 10 years on trumped-up charges of tax evasion. The Russian president is busy trying to persuade the world to come to Sochi for the 2014 Winter Olympics. Many world leaders have previously said they will not attend the Olympics in protest of Russian policies on gay rights and political repression, but with the new softer version of Vladimir it will be interesting to see which leaders make the trip. President Putin is looking for a place on the world stage to resurrect Russian prestige. Let the games begin.
***Watch out, beware. This is the holiday season and for traders and investors markets can be very thin and treacherous. The SWISS FRANC is a market that is making me very uncomfortable. The Swiss National Bank has proclaimed that it is opposed to an overly strong FRANC, especially in terms of the EURO. The ceiling for Swiss strength has been 1.20 versus the euro, a level the SNB has been able to maintain for two-and-a-half years. But with all the intervention and jawboning in an effort to weaken the Swiss Franc, the EUR/CHF cross presently resides at 1.2270. The Swiss is also very strong versus the U.S. dollar, and, more importantly, the Japanese yen. The Swiss/Yen cross is visiting 23-year highs.
If I ran the SNB, I would be looking at end-of-year thin markets to make a determined statement about the desire to weaken the Swiss franc. The franc has always been a store of value and considered safe haven in times of stress, so with global stock markets soaring and the pundits proclaiming the European financial crisis to be over, why is the Swiss so strong? Gold, which has similar characteristics to the Swiss franc, has been battered this year as global equity markets have soared. And the 2-year Swiss note has a NEGATIVE YIELD of 0.20% so you are paying to put your money in Swiss securities. So where gold has no visible return (unless you lend it out), the Swiss costs you money to own. Chairman Thomas Jordan, do you hear what I hear?