So much for that. The FOMC did pretty much as expected but the markets didn’t. The standard method for understanding the Fed is to compare statements and to look for the shifts in language. Yes, yes, yes, of course the “patience” has gone but the key to understanding quite how cautious the FOMC has become, one first needs to appreciate other buts of wording.
Thus, on January 28th the FOMC declared “economic activity has been expanding at a solid pace”. That has now become “economic growth has moderated somewhat”. It also notes that “export growth has weakened” and “Inflation is anticipated to remain near its recent low level in the near term.”
The big one, however is in the change of wording, if not necessarily sentiment, between January:
“the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. 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.”
… which was replaced yesterday by:
“the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”
No more patience; big deal!
No April hike. So what?
It was never on the cards anyhow.
The FOMC, once again, has played an absolute blinder and the theoretical physicists and maths majors with their MBAs and CFAs fell for it hook, line and sinker. The Committee told us nothing we should not have already know and anyone who didn’t get it ought not be on Wall Street but teaching home economics in Des Moines, Iowa.
The reaction was equally perplexing, other than maybe that of key markets such as equities and banks. Yet, the Dow closing 1.27% higher on the day and the S&P being up by 1.22% does not, in numeric terms, stand out as being anything exceptional.
I didn’t get the TV journos this morning who were dramatically talking of a market “surge”. I was expecting that to mean 3% or 4%, not 1.2%. The 14bp rally in 10-year Treasuries from 2.06 down to 1.92 was more impressive but again, it was not reflective of some significant game changer.
The real shock was supposed to have been in the value of the dollar against the euro which spiked from US$1.06 to US$1.10 and closed in New York at something in the region of US$1.0850. By this morning it is back at US$1.0750. In fact, the dollar had already been drifting off from its highs for a few days and all that has happened is that the tree has been shaken again. No need to cover your shorts; better use the weaker dollar to load up some more.
So, overall, the reaction to the much anticipated removal of the “patience” word has gone off rather smoothly. Nothing traded outside of a range which it might have been expected to do on any other given day and all that we are left with is what we should have expected: the gun has, since the completion of the tapering process and the end of QE, been out of the cabinet. Now it has also clearly been cleaned and oiled. What is has not yet been is loaded, cocked or aimed. Next.
Greeks tilting at windmills
Meanwhile that small country in the southeast of Europe continues to keep us entertained. In the latest piece of prime Athens rhetoric, Deputy Prime Minister Yannis Dragasakis has nailed the situation by acknowledging liquidity problems. Being asked about risks of running out of cash, he said: “We have obligations which, in order for us to meet, we need the good cooperation of the European institutions.” In other words, “If you don’t give us the money for us to give you your money back, then we won’t give you your money back”. How cool is that?
The outflow of money from the Greek banking system continues apace. The ECB is helping where it can as it increased the ELA allowance by €400mm. A goodly sum maybe but less than the Bank of Greece had asked for.
A few days ago, Morgan Stanley put out a nice piece of research on the Greece situation with another set of possible outcomes with attributed probabilities. A full “Grexit” was ascribed a 25% probability which seems to be more or less in line with consensus. The alternatives all contain a varying element of concessions on both sides of the argument. They would leave the Syriza government looking sad as they would require it to walk away from its election promises or at the very least it would have to employ a very, very flexible interpretation of what it said it would and would not do in order to placate the nasty but rich neighbours.
When all is said and done, I wonder who will prove to have been Don Quixote and who will have been the windmill.
George and the City
Finally, the Right Honourable George Osborne did his bit for the Tory cause yesterday by delivering an upbeat budget speech with plenty of little giveaways for the man in the street and no obvious gifts to the rich. The big bazooka was aimed at the City by way of a raising of the Bank Levy which will cost no votes at all. It was a bit of “We bailed you out, now its pay-back time” and I find it hard to argue against that.
His real winner, however, was purely rhetorical and political. At no point did he mention public services or the national Health Service. In doing so, he deprived Ed Miliboy the opportunity of an argument. The latter was clearly briefed on the subject and would have had his numbers at his finger tips. Osborne never gave him a chance.
Overall, it was a fairly cautious affair which tried to stress that the existing policy is working and that therefore there is no need to fiddle around with it too much. On the contrary; The Blue Rinse brigade (along with holders of marginal seats) will be disappointed that there were no pre-election fireworks, but Osborne has made a career of not managing according to opinion polls. He’s done quite well on that – I can’t remember such a low-profile Chancellor – and all he’s asking for is time to finish what he has started. Whether the British people believe in him and want him to do so or not will be seen in May.
