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Markets Capsized as the Fed Decides to Roll Over its Asset Purchases

Original Article from ForexTraders Forex News and Market Commentary

Needless to say, the main theme of today, and yesterday is the FOMC meeting, and the ensuing statement that mortgage paper purchases will be rolled over. This decision has been met with what seems to be a degree of panic in financial markets, mostly because it is seen as a sign of weakness and capitulation in the face of the obvious deterioration in U.S. economy.We did not expect the Fed to be so bearish, and were surprised at the strength of the commitment shown to flood more money into the market so soon. As we noted before, we did expect this to be the eventual course, but throwing the towel so fast, so to speak, and giving up all pretense of success so suddenly is a great surprise. The markets do not appear to have taken kindly to this show of weakness, which is in great contrast to Fed statements for many weeks and months that the economy is in a slow but certain phase of recovery.

The statement itself provides concise and reasonable summary of the overall situation in the U.S., shedding some light on the way the Fed perceives the impact of its actions since 2008.

“Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. “

We note four important points identified by the Fed as the cause of its actions. Constrained household consumption, weak commercial real estate market, subdued labor demand, and contracting bank lending. One doesn’t need to be a genius to see the self-sustaining potential of this picture, but it is surprising that the Federal Reserve

The statement goes on expressing the opinion that inflation will remain subdued, a point of view that we share. With the output gap, unemployment, and conmodity prices generally remaining in deflationary, or disinflationary trends, inflation does not appear to be a concern that policymakers need to worry about just now. Inflation expectations are dampened by consumers own experiences with demand, and also remain tame.

“Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. “

In the third paragraph, the FOMC declares its chosen remedy for the ills identified in the first paragraph. The remedy itself is identical to what was being expected by the vast majority of commentators.

“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. “

What they will be doing, in other words, is keeping the huge amount of money that has been pumped into the economy in place by extending its term. It is not very different in principle, from what forex traders do as they maintain positions from one day to another. If they had chosen to reinvest the principle in Treasury paper, for example, the decision would have eliminated an important support that has been keeping mortgage rates at historic lows, even as demand remains weak.

For us, as we noted before, the softness of the Fed in signalling a change in course so sharply, so suddenly contradicting all the messages that were being sent until a short while ago, is a matter of surprise. We would have expected them to wait a while longer, but it appears that they recognize the reality of the predicament that they face vis-a-vis the market, and don’t want to wait until there is a lot of tension forcing them to do what they will do anyway.

The consequence of this decision for markets is not that straightforward. On the one hand, we have had the Fed recognize that the direction of the economy is far from being clear. Nobody knows how long it will be before stimulus can be removed, and nobody can guess how far things will worsen before the turnaround occurs. It must be kept in context that, after all, what the Fed has chosen to do today is merely maintaining the status quo with respect to monetary easing. One can make the case therefore, that the factors that led to the depreciation of the USD, in the period leading to the FOMC meeting, remain intact. On the other hand, one could also say that the pessimism of the Fed is a sign that global growth will weaken, which would then justify the purchasing of USD since a sizable short position has already been built there by all accounts. Which of these courses the market will take depends on sentiment above all else, and we expect that to be determined by factors outside of the U.S., foremost among which we place the performance of the Chinese economy.

Apart from these we want to draw attention to a potentially very significant event via Bloomberg.

“Slovakia’s parliament rejected the nation’s participation in a loan for Greece after the month-old government overturned the previous Cabinet’s policy and said poor countries shouldn’t pay for the profligacy of richer peers.

Of the 84 lawmakers present in the Bratislava-based assembly, one voted in favor while 69 were against and 14 abstained, reversing a decision by the previous Cabinet to lend Greece 816 million euros ($1.1 billion). The funds were to be part of a loan package pledged by the European Union to help Greece avoid a default. The current Slovak government of Iveta Radicova, which took office last month, is against the aid. “

This is nothing less than shocking, as it breaks the voice of unity so far maintained about the Greece bailout. The dangerous question, once some nations refuse to participate in the bailout, is, “if they don’t do it, why should I?” Are Germans, French, and others the only fools in E.U. that they alone will cover the cost of bankruptcy by any member state?

This and similar questions promise that August will be an unusual hot month for those interested in finance.

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Cramer’s Stop Trading! The Fed Said Good Things. Buy (8/10/10)

Original Article from Seeking Alpha Jim Cramer

Miriam Metzinger submits:

Stocks discussed on Jim Cramer’s Stop Trading! TV Segment, Tuesday August 10.

Intel (INTC), Magna International (MGA), Lear (LEA), Scotts Miracle Grow (SMG)

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Fed Members Sound Cautious on Recovery

Original Article from ACM – Newsletter

The key takeaway for yesterday’s FOMC meeting was that Fed members seemed less confident about the US recovery. The erosion in their optimism spread quickly to weigh on risk-correlated trades and further contracted US yields. Interestingly, the knee-jerk reaction in the Forex Market was the buying of the EURUSD. The Euro jumped nearly 50 pips against the dollar but as further analysis of the…

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Weekly Review and Outlook: Dollar Broadly Lower as Markets Prepare for More Easing from Fed

Dollar was broadly lower last week as poor non-farm payroll report intensified speculation that Fed will re-start the quantitative easing program in this week’s meeting. Dollar index dropped to as low as 80.08 before closing at 80.41. Indeed, it was the ninth consecutive week of decline in the index, which
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Weak Data Takes the USD Down, but Expectations of Fed Easing Prop Carry Trades and Stocks

Original Article from ForexTraders Forex News and Market Commentary

All eyes are on Friday’s NFP release as it is usually the case in the first week of month, but even more so at the moment. The expectation is that disappointing numbers will lead the Fed to delay its balance-sheet decreases, which has the practical impact of further easing since the pumped liquidity remains to circulate in the economy. We think that the Fed is very far from any kind of tightening at the moment, with any rhetoric to the opposite effect merely directed at maintaining inflation expectations at a healthy level. The Fed will not tighten when there is even a remote danger of deflation on the horizon.

We take note of some of today’s important developments in the following section.

Retail Sales fall by 0.6 % in July

RedBook retail sales data showed a 0.6% m/m fall that was in line with market consensus for the month of July. Yearly numbers also matched expectations. On the whole this is a neutral piece of data, with little value since the consumer picture will remain weak as long as job prospects do not show a perceptible improvement. So as a leading indicator into consumer spending, Friday’s NFP release is of bigger significance.

USD Factory Orders Fall Much more than expected

U.S. factory orders fell by more than twice as expected according to numbers released today, at a 1.2% m/m rate. This is the second fall in a row, and doesn’t bode well for the performance of the manufacturing sector in the coming months, in line with our own scenario. Keep in mind that much of the numbers bought by the markets so far are from the past, and say little about the future. This, and the bleak pending home-sales number, confirm that the deterioration in the economic outlook is real. Still, we would like to think that the U.S. will not be the center of any downturn. China, Europe, and other nations that have so far remained out of focus should come back under attention as the weeks progress.

Pending home sales numbers, as we noted, came almost five times as bad as expected at -2.6% m/m, showing that the troubles in the housing sector are far from being over. Auto sales numbers, also being released today, confirm that the improvement seen until a few months ago is by now definitely over. Sales have been in a downtrend for quite while now. Bleak data on the whole, and as far as we are concerned, today’s very bullish atmosphere is unlikely to survive such downside disaapointments much longer.

USD sells off as Japan confirms that markets set forex rates

Japanese officials, including the minister of finance, have been commenting today that Japan is not happy with forex rates, that rising JPY has a negative impact on exports, that they are monitoring events closely. Still, they did not forget to add the scripted line that “markets set forex rates” which was quickly interpreted by enthusiastic USD-sellers as yet another excuse to buy EUR, JPY, AUD, and anything else that can be bought against the dollar. We never thought that the Japanese would do anything concrete to stop the Yen’s rise anyway, so the information today, if anything, just barely confirms the obvious that there won’t be any intevention for the foreseeable future.

The Yuan market was quiet today, as the PBOC set the central parity rate slightly higher than yesterday, somewhat curbing the enthusiasm of USD-sellers. Still, markets are spinning rumors at the moment about a potential rate hike by the bank, which we find extremely unlikely, but the anticipation might still lead to volatility in the NDF-market before matters are fully clarified.

Israel-Lebanon clashed spark alarm in the U.S.

Today there was a minor skirmish along the U.N-monitored border area between Lebanon and Israel where three Lebanese soldiers, and a journalist as well as an Israeli Lt. Colonel lost their lives. Washington was quick to issue a statement calling for restraint and calm. It is being reported, also, that Lebanese authorities at the highest level were contacting Israelis to prevent the event from escalating into something more serious. Commentators note that, since Hezballah itself doesn’t appear to be involved, it would, in principle, be easier to contain the incident. Forex is not showing any reaction to this development, although, with conflict with Iran always a grave danger for the region and for world economics, it is a good idea to keep an eye on developments here. For now this does appear to be an unplanned incident that will remain isolated in its impact. Nonetheless, it is surprising that August begins on such a hot tone, so to speak, on its third day.

As it is usually the case, the first week comes heavy on information and market action. The greatest feature is no doubt the NFP release on Friday, and we will update you on developments as we approach the exciting moment

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