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FOMC Minutes: Doves Are Perched Above The Market

08/23/2012

Yesterday afternoon the FOMC released the minutes from its two-day meeting on July 31-August 1. It is clear from the minutes that the “doves” were, and are, ready to act at the first sign of labor market weakness. I have engaged in multiple conversations with money managers since the release and also read the economists’ takes from multiple investment banks. Universally, myself included, the Street is surprised at how dovish the minutes present themselves.
 
In recent days I have suggested the Fed will not initiate further asset purchases at its September 12 meeting.  Taking it one step further, I have noted that more likely than not, the September 12 meeting will be a complete “do nothing” meeting. Yesterday’s minutes do not change my expectation, however, they elevate the importance of three things that investors and I should be watching to find out if my expectations are incorrect.
 
1.  S&P 500® Index (SPX) -  The SPX has risen from 1380 to 1415 since July 31 (Figure 1.1), a modest uptick for the American “wealth effect.” Since early Monday’s 1426.68 four-year high was established, a modest correction that I have categorized as “shaking the trees” has unfolded. investors should closely watch the 1391.74 support level. Maintaining above 1390 in the days leading up to Jackson Hole would contribute to the FOMC pausing on any new QE. Keep in mind, as the chart below depicts (Figure 1.2), when QE2 was announced at Jackson Hole in August 2010, the path for the SPX leading up to the announcement was much different than in 2012.  
 
2.  Bernanke’s Jackson Hole Speech –  Friday, August 31, at 10 a.m. Eastern time Chairman Bernanke speaks at the Jackson Hole symposium. After yesterday’s Fed minutes, the relevancy of that speech has now been elevated to a very high level. Investors must pay attention that morning. The Chairman will also have the Beige Book, which is released Wednesday, August 29, to help him further clarify the FOMC’s stance. He will deliver a message to the markets that morning.   
 
3.  August Nonfarm Payrolls – The July Nonfarm Payrolls report (Figures 1.3 and 1.4) was released on Friday, August 3, several days after the July 31-August 1 FOMC meeting. Had the FOMC been able to incorporate that labor report into its July 31-August 1 meeting, I suspect the incredibly dovish tone of the minutes would have been moderated. For the September 12 meeting, the FOMC will have the August labor report (released on Friday, September 7) to assist in its decision. Investors will know whether QE3 is coming on September 12 by 8:35 a.m. Eastern on Friday, September 7.
 
I stand firm in my expectation: this isn’t 2009 or 2010. The effects of a new round of QE on asset prices will be muted. Monetary easing that would most positively affect asset prices needs to come from the ECB. Domestically, the U.S. needs fiscal policy initiatives the most; that would have a positive effect on asset prices. At the very least, investors should view this week’s Fed minutes as a sign that “doves are perched above the market,” but I am not yet convinced that investors should break out the 2010 lower U.S. dollar reflation playbooks just yet.
 
Figure 1.1 SPX 2012 Year To Date

Source: Bloomberg
 
Figure 1.2 SPX 2010 – January 2010 to August 31, 2010 QE2 Announcement

Source: Bloomberg
 
Figure 1.3 U.S. Private Sector Jobs 2012 Year To Date

Source: Bloomberg
 
Figure 1.4 U.S. Private Sector Jobs 2010 Prior to August 31, 2010 QE2 Announcement

Source: Bloomberg

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