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Wednesday, September 18, 2013

It’s all about the Fed today, with the central bank expected to announce the long-awaited Taper decision later this afternoon. The markets will likely remain in a wait-and-see mode ahead of the afternoon announcement and subsequent Bernanke press conference. The Housing Starts data this morning, though a bit on the weak side, will likely not have much resonance given the Fed spotlight.

The markets have spent the last few months getting ready for the Taper announcement. As such, the actual Taper announcement later this afternoon may not carry much surprises. That said, there are still a number of aspects of the decision that remain uncertain. The size and composition of the Taper matters – will they cut by the expected $10 billion to $15 billion that everyone has been expecting or more? Will they cut back on Treasury bond purchases, mortgage backed securities, or a combination of the two?

A bigger Taper will be a negative surprise for the markets, but will actually be indicative of greater confidence within the FOMC about the economic outlook. On that front, we will also get today the FOMC members’ economic forecasts. It will be interesting to see how the Fed sees the growth picture next year at present, after they upgraded their outlook at the June meeting. The first time release of their 2016 forecasts will be instructive of how the Fed officials view normalized growth, interest rates, and inflation.

The Fed has been trying hard to explain that Taper didn’t mean tightening. To emphasize that point, they may update their long-term guidance by providing new thresholds for inflation and unemployment rate. The current guidance says that they wouldn’t think about raising rates till the unemployment rate stays above 6.5% and inflation remains below 2.5%. They could potentially provide the lower bound of their inflation range, to accommodate those that appear concerned about disinflationary trends. They could lower their unemployment rate target as well, but that could potentially muddy the Fed’s message. The Bernanke press conference will likely touch on most of these topics.

Fed is all the rage today, but the 2013 Q3 earnings results have started trickling in as well. We got results from FedEx (
(FDX - Analyst Report)), General Mills ((GIS - Analyst Report)), and Cracker Barrel ((CBRL - Snapshot Report)) this morning and Adobe Systems ((ADBE - Analyst Report)) after the cose on Tuesday. FedEx flew past estimates on margin gains, General Mills met expectations, Cracker Barrel beat expectations but guided lower, and Adobe came out with impressive subscription gains. Expectations for total earnings growth in Q3 have come down to +1.4% from the more than +5% expected at the start of the quarter, a trend that we have been seeing repeatedly over the past year or so. It will be interesting to see if the same trend will unfold for Q4 estimates, which is currently expected to bring in double-digit earnings growth.

Sheraz Mian
Director of Research

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