The Copy Machine is Fixed!

Last month we were slightly perturbed by evidence that the Fed's copy machine  seemed to be broken. After releasing FOMC statements throughout the year that looked like carbon copies of each other, the December statement boasted quite a few differences. We discussed the event in some detail at the time, so there is no need to go over the same ground again (as well-versed Kremlinologists, we offered what we believe was a reasonable explanation).

As the WSJ's trusty statement tracker reveals, the copy machine is back in working order – only, this time they have copied the December statement. There is really no point in parsing the de minimis semantic differences in a handful of sentences in which a single word or two were ever so slightly altered. The erroneous belief that these tiny changes hold clues to the thinking of the clueless really needs to be ditched. There are no secret messages hidden in there. If we know little, they are likely to know even less (their knowledge of the future state of the economy and how they will react to it policy-wise is usually strongly reminiscent of the CO2 concentration in the atmosphere if you get our drift…it's somewhere in the tiny region between nada and zilch).

The decisive point of the January meeting was contained in two sentences, namely the following:

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.”

(emphasis added)

Mo' taper! At this pace there are only about six meetings left for 'QE 3+4' to be finished. Of course our bet remains for now that it will probably never come to that, but whether it does or not will mainly depend on upcoming market developments (note: market developments rather than economic developments, as the latter are likely to lag).

The January meeting already sported the new voting roster, and with both Richard Fisher and Charles Plosser having a vote in 2014 there are two district presidents present who are considered far more hawkish than the board in Washington. However, there is also Narayana Kocherlakota, whom we must currently consider an ultra-dove. We actually have little idea where Sandra Pianalto stands, but that mainly means that she hasn't stood out with any strong opinions (otherwise we'd have heard about it already), so she seems unlikely to dissent with the majority. Fisher and Plosser are highly likely to argue for a continuation of the 'taper' course even if the stock market tanks more forcefully (at least Fisher is already on the record regarding this point).

Anyway, depending on developments in financial markets, inflation expectations, and possibly payroll trends, this year's roster could see a bit more dissension than we normally get to see. Not that it matters much – the 'hawks' remain a small minority and will be outvoted if need be.

Initial Market Reactions

It is hard to say whether the widely expected further reduction in 'QE' was really behind the moves in the markets after the announcement today, or if it was  merely a continuation of the moves that already started earlier after Turkey tried again in vain to stop the bleeding in its currency.

One thing is worth pointing out in this context: as soon as the Turkish rate hike announcement came through, a number of other EM currencies strengthened  slightly, but came almost immediately under pressure again, presumably based on the idea 'let's sell all the currencies of EMs whose central banks haven't doubled their repo rate today'. The ensuing waterfall right away re-engulfed the Turkish lira as well, so Turkey has so far almost nothing to show for its efforts. It was an equal opportunity massacre, although of varying intensity. The Argentine peso ended the day at a slight new closing low, and the South African Rand closed at its weakest level since 2008 (and on a weekly/ monthly closing basis, its current level would actually be the weakest in 13 or 14 years).

Our earlier addendum to the article on Turkey doesn't need much updating actually: the FOMC announcement was followed by gold catching even more of a bid, EM currencies weakened again, and stocks took it on the chin. None of this was supposed to happen according to the year-end consensus. Back in November, we actually said with regard to the 'taper' and gold: bring it on!  Our idea was this:

“We are actually beginning to think that the actual 'taper' may be the best thing that could possibly happen, because it will likely produce results that will lead to the anticipation of even more reckless policy than has been seen hitherto…”

It should be added to this that we are pretty sure almost no-one in the gold market thinks about things this way at the moment. And yet, this may be precisely what gold is attempting to discount. Throughout 'QE Inf' gold fell because the market was scared of the eventual end of QE and the much touted 'return to business as usual' (no more silly crises). Now tapering has begun, and there is promptly a kind of mini-crisis underway…and contrary to widespread expectations, gold is actually catching a bid. To be sure, it is too early to tell if the above mentioned idea really has merit. We'll have to wait and see what happens over the coming week at least (gold needs to cross above $1,270-1,280, and better yet $1,300 to really look technically convincing).

The stock market meanwhile continues along the lines of the previously discussed  'three peaks and a domed house' (3P+DH – schematic) formation. It may of course still diverge from it in coming days or weeks, but so far, it continues to follow the template (which is actually more eerie by the day).

Below are a few charts illustrating the above discussed developments. We'll start with a few EM currencies:

The South African Rand (ZAR), hourly. Note that from intraday low to intraday high it actually made a move of more than 40 cents – that is a lot of wood for a single trading day. We should probably call this formation the 'Turkey sandwich' - click to enlarge.

To add some perspective, here is a monthly chart of the ZAR. As can be seen, it hasn't had such a weak close in a very long time – click to enlarge.

A close up of the year-to-date action in the Argentine peso (daily chart). It has built a consolidation triangle in recent days and appears to be breaking out from it – Wednesday's close was the weakest yet since the decline began – click to enlarge.

And another look at the Turkish lira – right after the Fed announcement it resumed its decline – click to enlarge.

February gold, 20 min. chart – after weakening prior to the FOMC announcement, gold caught a bid on the Turkish misfire and then surprisingly caught even more of a bid after the announcement. Note the initial wobble (the 'everybody knows….' reaction) that then was reversed. Generally such behavior is regarded as bullish (a slight dip on ostensibly bearish news, followed by a close near the day's highs). Of course one must be careful not to read too much into the action, given that it was just one day. At least it looks good in the short term time frames now – click to enlarge.

The DJIA fell by nearly 190 points on Wednesday, ending at a new low for the move. In spite of our reservations about the 3P + DH formation, that it what it so far continues to build. In the short term it is beginning to look a tad oversold though – click to enlarge.

Conclusion:

Somehow we still find it a bit difficult to believe that 'QE tapering' is backfiring already. And yet, the markets are acting as if traders have changed their mind about it. To this it must of course be added that there is probably no single trigger that can be blamed for the market moves we have recently witnessed. The news almost always seem to fit the trend after all. However, it is a near certainty that money supply growth in the US will decline further as a result of the policy change. Whether it is already influencing the markets or not, it definitely will do so eventually.

_{Charts by: Barcharts, Investing.com, StockCharts, MSN}