Wednesday, August 11, 2010

The Day after the Fed announcement: uncertainty

Courtesy of Kimberly DuBord,

Kimberly DuBord is the Director of Research for Briefing Research,'s new strategic investment research service. To request a free trial please email

It is the morning after the FOMC meeting and market participants globally are feeling a renewed, heightened level of uncertainty. U.S. equity futures are pointing to over a 100-point drop in the Dow, while the Treasury market strengthens with 10-year yields falling to 2.72%. The global risk appetite has evaporated with crude falling and gold and the yen gaining ground.

The Fed's policy statement Tuesday did little to alleviate double-dip concerns. In actuality, it may have fanned the fears of a downturn.

The directive from the FOMC suggests to us that the Fed is as uncertain about the outlook as the rest of us, especially when taking into account the Aug. 2 speech from Chairman Bernanke who thought then that growth in real consumer spending seemed likely to pick up in coming quarters. In any event, waffling by the Fed is not a confidence builder.

There is clear disconnect amongst Fed members with St. Louis President James Bullard and the Kansas City President Thomas Hoenig taking opposite views. While Hoenig is arguing for a contraction in the Fed's balance sheet and more restrictive language, Bullard is arguing for moves to prevent deflation.

The FOMC decided to keep the Fed's balance sheet steady, choosing to reinvest maturing principal payments from agency debt and MBS in Treasuries. The markets' reaction reflects disparate signals. The fact that the Fed still has to act in a stimulative manner at this point in the process is contributing to concerns that this will be a protracted recovery.

The equity, bond, and currency markets are being re-priced accordingly.

The yen hit a 15-year high against the dollar at 84.73 -- causing a sell-off in the Nikkei. The dollar made gains against the euro and pound, with the U.S. Dollar Index holding above 81.50. Commentary from the Paris-based International Energy Agency of "significant' risks to an economic downturn is only adding more downward pressure to oil prices, which has little fundamental footing above $80 per barrel in this economic climate.

Add in a downbeat growth forecast and slowing inflation forecast from the Bank of England, coupled with weaker economic data in China only stoking the "slower for longer" fires further. The BOE forecasted inflation of 1.5%, under its stated goal of 2.0%, while growth is now targeted to peak at 3.0%, below its May estimate of 3.6%.

The economic data out of China is holding influence over the market. While data ranging from industrial production to retail sales and new lending came in generally as expected, market participants are taking note of the downturn in economic activity. The fears of a hard landing remain close to the surface. For their part, local market participants took a more benign view of the data, lifting stocks despite broad-based declines in the rest of Asia overnight. China has, thus far, executed a "soft landing."

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