Recap 12-18-13: Finally


So the Fed finally tapered. Life can continue. 10bn was more than expected, but to offset that they changed the language around the UER threshold to ‘well below 6.5%’ and also lowered Fed Funds projections by 25bps. They also lowered the 2014 Core PCE inflation projections as well as the Long Term growth estimate range a smidge. The 25bp drop in projections basically just moved the implied first hike month from July/Aug 2015 to Sept. There was little risk premium priced into the Eurodollar strip going into the meeting vs projections, so even with the dovish front end projections, the ED strip sold off. At current levels, they remain fairly close to the new projected levels, which is the same as saying that there doesn’t seem to be a ton of value at these prices.

Equity market participants seem to have been pretty stressed about a taper and have been buying puts consistently over the past several weeks. Prior to today, the VIX has risen for 14 of the past 16 trading days, the first time that has ever happened, even as the S&P has been range bound. As a result, and in hindsight, the lack of an aggressive taper was bullish.

Seasonality continues to imply a bullish bias through year end, although I’d note that the seasonality bias may have weakened somewhat and shifted to January over the past several years as more and more banks have adopted Dec 31 year ends. (Previously, investment banks with Nov 30 year ends and lots of prop desks put on trades in Dec and may have strengthened that seasonal bias)

Separately, this chart below from Goldman shows another how de-levering in the Eurozone has sharply impacted how EU corporations have been using their earnings, a trend that seems likely to persist:


  • Fed tapered by 10bn, split between MBS and Treasuries, starting in January. Excerpts from the statement:
  1. If incoming information broadly supports the Committee’s expectation … the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course,
  2. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
  3. The Committee now anticipates … 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 6-1/2 percent

FOMC Central Tendency Projections:

  1. End 2015 Fed Funds Rate: 75bps vs 100bps prev
  2. End 2016 Fed Funds Rate at the end of 2015: 175bps vs 200bps prev
  3. End 2014 Unemployment: 6.45 vs 6.6 prev
  4. End 2014 Core PCE: 1.5 vs 1.6 prev
  5. Long Run Real GDP Estimate: 2.2-2.4 vs 2.2-2.5 prev

US Housing Starts rose to 1091k in Nov vs 955k exp and 889k prev

German IFO rose to 109.5 as exp vs 109.3 prev

UK employment increased 250k 3m/3m versus 165k expected. The ILO unemployment rate declined to 7.4% vs as exp and 7.6% prev. UK jobless claims declined by 36.7k versus 35k expected. The claimant count rate declined a tenth to 3.8% as expected.

MPC minutes showed a unanimous vote for unchanged policy. It also noted that the level of the sterling could become a risk to the recovery if it keeps moving higher.

CNBC said there were rumors in Japan of an Abe strategy announcement on Thursday.

Stanley Fischer clarified his quote on forward guidance: “There’s a slight problem with forward guidance: you have to decide whether you give dates, which is what they gave in the beginning, or whether you give conditions. They’ve moved to giving conditions. That’s more appropriate. That should be, I think, the forward guidance.”

Goldman is reining in riskier activities, shrinking its balance sheet and avoiding businesses that don’t have double digit returns. New regulations have made it too expensive to operate as it had during the boom years. WSJ

German finance minister Wolfgang Schaeuble says fewer banks than thought may need capital following asset quality review – Bloomberg

Viktor Yanukovich, Ukraine’s president, took a decisive step towards Moscow’s orbit on Tuesday when he agreed to a massive bailout of his country via Russian investment of $15bn in Ukrainian bonds and a cut in gas prices worth $4bn. But the move risked inflaming pro-European protests – now in their fourth week – in Kiev and other cities and exacerbating what is already Ukraine’s worst political crisis since independence from the Soviet Union in 1991

Upcoming Data:

  • Wed: RBA FX Transactions
  • Thu: UK Retail Sales, US Philly Fed, Existing Home Sales, GfK Consumer Confidence
  • Fri: Quadruple Witching, BoJ, Canada CPI, Retail Sales
  • Mon: CanadaGDP, US Personal Income, U Michigan Confidence,
  • Tue: US Durable Goods, New Home Sales