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Wednesday November 24, 2010 - 16:55:47 GMT
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The Post-FOMC Minutes, Pre-Turkey Day, Data Dump

Here’s the data dump:

·         Weekly jobless claims have fallen to a level not seen since July 2008. That’s good.

·         Durable goods orders fell by -3.3% versus expectations for no change. That’s bad.

·         The year-over-year PCE price index a tad lower than expectations; core PCE price index at record low. Where’s the inflation?

·         Consumer spending a tad higher than expectations: +0.3% versus +0.2%. That’s decent.

·         US personal saving rate a tad higher than expectations, up +0.1% from September to October. That’s decent.

·         US personal income rose by 0.5%. That’s good.

So we have positive news for the consumer with not-so-good news for economic activity. The kneejerk reaction to all of this is so far positive for stocks. A short-term chart of the S&P 500 futures shows prices spiking to test the underside of the 72-hour moving average (center line). If the reaction rally fades here, we would expect the S&P heads back towards the lower bound of the Bollinger Bands: 

[Chart not available in text format]

This move in stocks created a similar risk-appetite reaction in the currencies – the US dollar falling back rather sharply towards hourly support. Looking at the 72-hour moving average and Bollinger bands, the US dollar index has some room to the downside if it gets through near-term support:

[Chart not available in text format]

Now let’s broaden our scope, and see where all this data can be pieced in ...

There’s a computer generated cartoon parody being passed around about the Federal Reserve and the quantitative easing. It basically serves to bash QE2 and the Federal Reserve and all the disingenuous connections between Fed policy decisions and Goldman Sachs. But the dialogue worth noting today, which admittedly is an exaggeration, comes when the question is asked: “Has the Fed ever done anything right?” The answer: “No. Never.”

Surely they have done some things right, even if those things go unnoticed as their errors become heavily publicized. Which brings me to something in the FOMC minutes yesterday, specifically the committee’s discussion on what other measures (besides QE2) it could take to do whatever it is they say they want to do by implementing QE2.

First, here are two ideas we’ve discussed here and there over the last couple quarters:

1) The markets have returned to order in large part thanks to policymakers’ heavy-handed approach and shoring up investor sentiment. It’s been very frequently argued that all stimulus and bailout efforts have been, conspicuously or inconspicuously, aimed at the banks and too-big-too-fail institutions ... rather than Main Street. The result has been a tangible recovery in the markets, with a much more shaky recovery in the real economy.

2) The Federal Reserve is losing its credibility. This idea was also mentioned in that video parody. But the real pressure began way back with introduction of the House of Representatives bill to audit the Fed, led by Congressman Ron Paul. The Federal Reserve’s role and decisions, all the more important in tough economic times, have fallen under severe scrutiny, seemingly for good reason.

So ... in looking at the minutes yesterday, it was surprising to see that “having Chairman Ben Bernanke hold periodic news briefings,” according to Reuters, would be something the Fed would think of as a way to reverse high unemployment and incite a pickup in economic activity. It seems it would be a mere supplement to the ongoing perceptions management campaign that policy-makers maintain.

Then again, it could be looked at from a “transparency” angle and welcomed in that regard. But it simply shows how much the Fed believes bolstering sentiment will support the markets and, in turn, encourage economic activity -- a tall task, indeed, considering the public perception of the Fed at this moment in time.

Even still, what would periodic news briefings do to the spin cycle that today’s constant flow of news has become for the markets? Agitate it a little more, maybe. With all the scrutiny of the Fed, the public understands and respects the magnitude of its every move, and the Chairman’s every word, perhaps even more warranted.

Which brings us to the growth forecasts scattered throughout the FOMC minutes ...

As might have been expected, their outlook is not pretty. Their growth forecasts have been revised lower; their expectations for unemployment have become less optimistic. The Fed forecasts, however, are rosier than those of private economists as this chart shows:

[Chart not available in text format]

Basically, it leaves open the two scenarios as discussed in yesterday’s writing: 1) US dollar catches a risk bid as lower US economic forecasts add to other global economic risks coming to a head, or 2) US dollar resumes a steady decline as the US is seen as the growth laggard among major economies.

It’s a whirlwind of US data shaking up prices right now, but the way prices have unfolded this week up until now we tend to gravitate to the former scenario as that which will influence markets most, at least through year end. If this data-driven risk-appetite move is reversed before the day is over, it would lend some support to the risk-bid scenario. We were busy with issuing new trading alerts this morning, following yesterday very nice, very quick, gains in the euro and Australian dollar. Please reference the chart updates for details on these new positions.


John Ross Crooks III

Black Swan Capital LLC


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