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Wednesday, November 20, 2013

A positive Retail Sales report and benign inflation reading provide the backdrop for today’s trading action as we wait for minutes of the last FOMC meeting this afternoon. The drop in ‘headline’ inflation and the gains in Retail Sales  appear to be related to the drop in gasoline prices. This is a net positive development the holiday shopping season, the less than reassuring guidance from Wal-Mart (WMT - Analyst Report), Best Buy (BBY - Analyst Report) and others notwithstanding.  

The utter lack of inflationary pressures in today’s release could play into the ongoing Taper debate. But the question still remains a key source of uncertainty and minutes of the October Fed meeting on tap for release later today are unlikely to give us any fresh clues.

In his Tuesday comments, Bernanke emphasized the Fed’s readiness to keep rates low even after the unemployment rate falls below their current target of 6.5%. This isn’t the first time Bernanke has tried to emphasize ‘forward guidance’ as a key tool in their monetary policy tool kit, which they believe is more effective than the QE program. Bernanke and other Fed officials have long argued that both ‘forward guidance’ and bond purchases have been essential to the recovery, though they are less certain about the long-term negative effects of bond purchases.

This a key part of the Fed’s messaging system at this juncture as they want to keep long-term interest rates firmly anchored by ‘forward guidance’ when they start reducing the pace of their monthly bond purchases. The rise in long-term interest rates in the wake of Taper talk, from 1.6% in May to close to 3% a couple of months later, had come as a surprise to Fed officials and they would like forestall that from happening once Taper actually gets underway. Today’s FOMC minutes are unlikely to provide any fresh clues on the Taper timeline as the market wasn’t expecting any announcement in the October meeting. Uncertainty about Taper timing is the only key issue at this stage, as many in the market are justifiably unwilling to take a potential December announcement off the table.

Sheraz Mian
Director of Research

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