North American Wrap: The King is Dead…

The King is Dead…

The North American trading session was pretty copacetic to start, but got much more interesting as the day wore on specifically due to the elephant in the room named the Federal Reserve.  While most investors and pundits had a general idea what the Fed would be doing today, the brevity of it all still had a large impact on markets as the preparation for what’s to come next from the monetary institution began in spades.  Broadly speaking equities and commodities fell, while bonds and the USD rose as the Fed’s monetary statement indicated that Quantitative Easing was dead.

But is King QE really dead?  Not really, it’s just being outsourced to the European Central Bank for the time being, but it may very well be the death of QE in the US.  With unemployment getting better by the month, consumer confidence riding high, inflation somewhat near where the Fed wants it, and growth progressing along, the Fed may very well be done with the long national nightmare of Large Scale Asset Purchases.

As for the implications moving forward, the Fed’s statement went to great lengths to try keep a dovish lean while sounding hawkishly confident and firmly indecisive.  If you’re confused by that last sentence, then I have successfully crafted a statement that engenders all that the Federal Reserve has become under Chair Janet Yellen; extremely non-committal.  Speeches by Yellen as well as statements written under her direction appear transparent, but are very often simply playing both sides of the fence.  It’s almost like your local weatherman saying that tomorrow will be a sunny day, but if clouds show up, it might rain.  You could argue that information is given, but how useful is it?

There is probably no better example of this duality in the Fed’s recent statements than this paragraph:

“The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

First of all, just in case you haven’t downloaded a “Translate the Fed” app on your iPhone yet, allow me to hash this out for you: “If things get better, we might raise rates; if they don’t, we’ll keep rates low.”  Second of all, I need to invent a “Translate the Fed” app and sell it for $0.99 so I can make literally 10’s of dollars.  Thirdly, REALLY?! 

In summary, the Fed’s transparency and forward guidance is quickly turning in to obfuscation and forward shoulder shrugs.  However, if you wanted a thumb up or thumb down proclamation from the Committee, the mere fact that they moved forward with the plan to eliminate QE could be viewed as a hawkish development and a gradual return to normal monetary policy.  If the economy now does its part by maintaining the current momentum, QE could remain dead in the US, but be fat and happy in Europe therefore supporting the current status quo of equity market strength.  Long live the King!

Looking Forward

As I go to press, the Reserve Bank of New Zealand hasn’t yet made their monetary policy decision, but by the time you are reading this, it will likely be out, so I guess there’s not much I can tell you to prepare for it.  Other than the RBNZ, Australia will be releasing New Home Sales which has flip-flopped the last five months between positive and negative.  If that pattern remains, then watch for a negative result which may not have enough oomph to add on to the already falling AUD/USD.  Rather, a positive result could help the AUD/USD recover some of the losses it has taken post-FOMC.