Recap 9-13-12: The Fed Will Help You Buy Your Dream Home

~ globalmacrotrading

Commentary:

The Fed seems aware of the fact that the effectiveness of additional QE has declined sharply. As a result, it has committed to a very aggressive, open ended QE program despite the fact that low growth has continued AND IT UPGRADED its economic outlook for 2013. Note that this is in contrast to the prior instances of QE, when the Fed acted in environments of rising recessionary risk. Today, in addition to committing to keeping rates at 0 through mid 2015, the Fed announced it will be buying 480bn of MBS every year until … it decides it should stop.

MBS current coupons currently average ~2.2%. Only 50bn of 3% coupon 30yr GSE MBS exist. (Essentially no MBS exists with lower coupons) Only 389bn of the 3.5% coupons exist. 50+389=439. So the 480bn per year purchase commitment by the Fed entails that the Fed will essentially own ALL new MBS issuance over the coming year unless purchase & refinancing activity picks up sharply. In other words, the Fed IS the mortgage market.

Here are some questions for your consideration:

Shorter Term Questions: 3m Equity implied volatility declined to the lowest level since 2007 today. Is that sustainable if the Fed will do QE forever? Also, since the market is rising on PE expansion alone, sentiment & the Fed are the only drivers. How does a macro manager know when to buy or sell stocks? Is it time to give up trading on the data?

Longer Term Questions: What’s the end game? Will the Fed keep buying MBS until mortgage rates decline to 0? What’s the floor for effective mortgage rates? How far up can the Fed push PE ratios? What will the Fed do if there is another risk of a recession? Buy more? Will it then have to switch to other markets because it already is such a large part of government sponsored asset markets?

Notable:

  • FOMC Statement:
  1. Open Ended QE via 40bn per month of MBS purchases
  2. Anticipates exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015
  3. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.
  4. Markets continue to pose significant downside risks to the economic outlook.
  5. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

FOMC Forecasts & Changes since June:

  1. 2013 Unemployment: 7.75%, unchanged
  2. 2014 Unemployment: 7% DOWN from 7.35%
  3. 2013 Growth: 2.75% UP from 2.5%
  4. 12 of 19 members forecast the first hike in 2015

Upcoming Data:

  • Fri: EU CPI, Employment, US CPI, Retail Sales
  • Mon: US Empire Mfg, RBA Minutes
  • Tues: UK CPI, German Zew, NAHB Housing Index, Dudley Speaks
  • Wed: BoJ, BoE Minutes, US Housing Starts, Existing Home Sales
  • Thu: EU PMI, US Jobless Claims

Published by globalmacrotrading

I am a G20 Global Macro Portfolio Manager in NYC. My background includes stints at a major investment bank, a commodities market maker, and one of the world's largest global macro hedge funds.

2 thoughts on “Recap 9-13-12: The Fed Will Help You Buy Your Dream Home”

  1. Did we just witness the “helicopter” moment??? With all the QE3 chatter before the statement I was rather surprised at the market response, perhaps the indefinite component drove that?
    I see it as a rather disturbing non-confidence vote by the FED.
    It will certainly be interesting to see where the $~400B that gets squeezed out of the MBS market ends up
    Funny that the FOMC 2013 growth target is the same size as that QE?
    Interesting times indeed.

    1. Yeah, I’m not totally sure on what the surprise was either. Perhaps the “we will ease well after the economy actually needs it” part.

      Didn’t realize that growth target is the same as QE size. Jeez.

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