http://zerohedge.blogspot.com/2009/04/are-fed-and-markets-on-same-page.html
Wednesday, April 29, 2009 Are Fed And Markets On Same Page?
Posted by Tyler Durden at 3:55 PMLast thoughts for today from D. Rosenberg. Furthermore, the fact thatthe WHO just raised the Black Swine pandemic to level 5 should forcemore SPY "deleveraging" compliments of JPM, DB and UBS. To paraphraseWHO chief Margaret Chan: "it really is all of humanity that is underthreat in a pandemic."
Mr. Market is to be respected, but he is not always correct
We find it rather difficult to square today’s Fed press statement withthe amazing reversal in investor sentiment towards euphoria over thepast several weeks. The equity market is, as we all know, a forward-looking barometer, and now seems to have gone further than merelypricing in “green shoots”, to discounting the righthand side of the‘V’. Mr. Market is to be respected, but he is not always correct.
Fed has a more somber forecast than Mr. Market
The Federal Reserve does possess the largest US macroeconomic model onthe planet, and although the central bank acknowledged the obvioustoday (that “the pace of contraction appears to be somewhat slower”,which was hardly a resounding endorsement for the second-derivativeviewpoint, in our view), it seems to have a much more somber forecastof the economy (that “economic activity is likely to remain weak for atime”) compared to Mr. Market.Disconnect between Fed & market’s ability to sustain rally Althoughthe “outlook has improved modestly since the March meeting”, theoperative word is “modestly”. In addition, the “remain weak for atime” quote resonated with us even if the market has largely shruggedit off. The Fed certainly does not have a perfect forecasting trackrecord , but let’s just say that there does appear to be a disconnectbetween the central bank’s choice of words to describe the economicbackdrop and Mr. Market’s ability to sustain this vigorous rally.
Never in the past 60 years have prices dropped this much
As for Treasuries, the selloff continues unabated, and comes on a daywhen real GDP contracted at over a 6% annual rate with confirmation ofa deflationary environment with the gross domestic purchase deflator(GDP deflator ex trade) declining at a 1% annual rate on top of a 3.9%annualized slide in the fourth quarter of 2008. In fact, at no time inthe past 60 years have we seen domestic prices fall this much over asix-month span.
Fed views deflation as the primary risk
Perhaps the market was expecting that the Fed would announce more interms of the size of its bond-buying program (which was notforthcoming) and viewed the press statement as a disappointment. Butas we stated this morning, periods of deflation in the past weretypically met with long-term yields in a 2-3% band with nearconsistency. The Fed may have tweaked how it portrayed the currentclimate in today’s statement, but what it did not change was its viewthat deflation remains a primary risk – “the Committee sees some risksthat inflation could
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