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Weekly Economic Commentary 9/23/2013

Weekly Economic Commentary 9/23/2013

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Weekly Economic Commentary 9/23/2013
Weekly Economic Commentary 9/23/2013

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Published by: monarchadvisorygroup on Sep 26, 2013
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Member FINRA/SIPCPage 1 o 5
Weekly Economic Commentary
September 23, 2013
John Canally, CFA
EconomistLPL Financial
Communication Breakdown?
In our view, Bernanke made a clear case tomarkets last week that tapering remains datadependent, and he even provided markets withspecic metrics the FOMC was watching togauge progress.Market participants may need to recalibrate howthey listen to the Fed, and the Fed may need torethink how it communicates with the marketsand the public.The Fed will need the markets’ trust as it beginsto prepare or the unwinding o all the monetarystimulus it has put into the system since 2007.
In our recent
Weekly Economic Commentary: Trust 
(September 9, 2013),we argued that there was not a clear-cut case or tapering based only onthe economic or infation backdrop. Instead, our view was that concernsexpressed by Federal Reserve (Fed) ocials over the past six monthsor so — that additional quantitative easing (QE) could potentially disruptthe smooth unctioning o securities markets, cause investors to takeon excessive risk and “reach or yield,” and add to nancial instability inthe global economy — would tip the scales in avor o a taper. Perhapsmore important, in our view, were shiting market expectations sinceFed Chairman Ben Bernanke’s testimony beore the Joint EconomicCommittee o Congress in May o this year, when he said:
I we see continued improvement, and we have confdence that that is going to be sustained, in the next ew meetings we could take a step down in our pace o purchases.
Financial market participants had since come to expect that the Fed wouldbegin to taper this month, absent a major downshit in the economy. Ourview was that i the Fed did not ollow through on tapering, it risked losingthe market’s hard-earned trust, and any trust the markets have in theFed today will likely come in handy when the Fed has to begin removingstimulus and raising rates in the years ahead.
“The Song Remains the Same”
Ultimately, however, the trust argument did not win the day. The Fedsurprised almost everyone last week (September 16 20) as the Fed’spolicymaking arm, the Federal Open Market Committee (FOMC), votedto maintain its current pace o combined purchases at $85 billion oTreasuries and agency mortgage-backed securities (MBS) as part o itsQE program. In making the decision, the FOMC cited tightening nancialconditions (likely largely in the orm o higher mortgage rates and thefow o credit to small- and medium-sized businesses), the loomingscal debates, the still-sluggish economy (real gross domestic product[GDP] growth is tracking below 2.0% in the third quarter o 2013), andthe sluggish labor market as the reasons or continuing purchases atthe same level. In addition to maintaining the current pace o QE, theFOMC strengthened its commitment to keeping its ed unds ratetarget currently near zero at that level until well ater it nally windsdown its QE program.
Source: Bureau o Economic Analysis, Haver Analytics 09/20/13Shaded areas indicate recession.
Ination Remains Well Below the Fed’s 2.0% Target,Arguing or a Wait-and-See Approach on Tapering
60708090001012%10%8%6%4%2%0%PCE Less Food and Energy: Chain Price Index
% Change, Year to Year, Seasonally Adjusted, 2009 = 100
LPL Financial Member FINRA/SIPC Page 2 o 5
The FOMC’s actions surprised market participants, who expected theFOMC to begin tapering its purchases to around $70 or $75 billion permonth, rom the current $85 billion per month, and also to conrm that QEwould end by mid-2014. Instead, the FOMC backed away rom its earlierguidance about ending QE in mid-2014, suggesting a later start dateor tapering and a later end date or QE, likely late 2014. In his preparedremarks prior to his post-FOMC meeting press conerence on Wednesday,September 18, 2013, and during the Q&A period o the press conerenceitsel, Bernanke worked hard to convince markets that tapering was nottightening, noting:
...even ater asset purchases are wound down which we will do in a manner that is both deliberate and dependent on the incoming economic data the Federal Reserve’s rate guidance and its ongoing holdings o securities will ensure that monetary policy remains highly accommodative.
“Good Times, Bad Times”
A quick review o the public appearances made by Bernanke andhis colleagues on the FOMC since early May 2013, as well as theFOMC statements and minutes rom the June and July FOMCmeetings, do show that Fed ocials essentially repeated that samemantra predicating a tapering this all on better data. Markets, especiallyxed income and many emerging markets, reacted switly to (some o)Bernanke’s words during the spring and summer and drove bond yieldssharply higher, largely ignoring the data dependent part o the Fed’s case.Looking ahead, market participants may need to recalibrate how they listento the Fed, and the Fed may need to rethink how it communicates withthe markets and the public. In an eort to aid the market, and be moretransparent, Bernanke laid out the Fed’s action plan or the next severalFOMC meetings in several key passages rom last week’s post-FOMC pressconerence[“Ramble On”]. In addition, Bernanke specically mentionedseveral metrics the FOMC will be watching in the coming months as itdecides whether or not to taper. The indicators he mentioned were:
The personal consumption defator excluding ood and energy (alsoknown as the core PCE defator)
The Labor Market
Private sector job count
Unemployment rate
Initial claims or unemployment insurance
Aggregate hours worked
Consumers’ assessment o whether jobs were easy or hard to get
The labor market participation rate
“In September 2012, the FOMCinitiated a program o purchasing$40 billion per month in agencymortgage-backed securities, inaddition to the $45 billion per monthin longer-term Treasury securitiesthat we were already acquiringas part o our Maturity ExtensionProgram. We stated that, subjectto our ongoing assessment o theecacy and costs o the program,purchases would continue until wesaw a substantial improvement inthe outlook or the labor marketin a context o price stability…theCommittee agreed today to continueasset purchases at that rate, subjectto the same conditions that we laidout a year ago.”
“Ramble On”
The following quotes are from Bernanke’s post-FOMC statement and press conference Q&A
“But in evaluating whether a modestreduction in the pace o assetpurchases would be appropriateat this meeting, however, theCommittee concluded that theeconomic data do not yet providesucient conrmation o itsbaseline outlook to warrant such areduction. Moreover, the Committeehas some concern that the rapidtightening o nancial conditions inrecent months could have the eecto slowing growth…“
LPL Financial Member FINRA/SIPC Page 3 o 5
While Some Labor Market Indicators Have
Met the Fed’s Expectations…
...Many Other Indicators Remain
Stubbornly Weak
 and Argue or a Wait-and-See Approach on Tapering
Sources: Bureau o Labor Statistics, Department o Labor, Haver 09/20/13Shaded areas indicate recession.
9095000510909500051090950005105000-500-1000Change in Total Private Employment
Seasonally Adjusted, Thousands
10%8%6%4%2%Civilian Unemployment Rate
16-Year+, Seasonally Adjusted
67.5%66.0%64.5%63.0%Civilian Participation Rate
16-Year+, Seasonally Adjusted
675525375225Unemployment Insurance: Initial Claims
4-Week Moving Average, Seasonally Adjusted, Thousands
6020-20-60% of Respondants Saying Jobs Are Easy to Get Less % Saying JobsAre Hard to Get
5.00.0-5.0-10.0Agg. Weekly Hours Index: Production & Nonsupervisory, Total PrivateIndustries,
% Change, Year to Year, Seasonally Adjusted, 2002 = 100
6420-2-4Real Average Hourly Earnings: Production & Nonsupervisory,
% Change, Year to Year, Seasonally Adjusted, ‘82–’84 $/Hour
45.037.530.022.515.07.5Average Duration of Unemployment
Seasonally Adjusted, Weeks
14001000600200Discouraged Workers
Not Seasonally Adjusted, Thousands

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