Is Wednesday’s Fed meeting superfluous? Based on today’s reaction to the announcement that Larry Summers had taken himself out of contention to be the next Fed chief, it just might be.REUTERS
The Dow Jones Industrials have gained 151 points, or 1%, to 15,527.07 today, while the S&P 500 has risen 0.8% to 1,701.64. The Nasdaq Composite has advanced 0.4% to 3,738.58.
Everyone’s focus was supposed to be on the Fed meeting wednesday, where investors would learn whether tapering was actually going to begin. Instead, Larry Summers announced that he would not seek to take over for the departing Ben Bernanke and market rallied. That suggests the market might care more about who will head the Federal Reserve after BErnanke’s term ends in 2014, more than the beginning of tapering.
Deutsche Bank’s Jim Reid explains what comes next:
Well a highly anticipated week has started with a bang as late last night Summers pulled out of the race to be the next Fed Governor after what was becoming an increasingly difficult political battle for him to win. In a week where the FOMC will likely start to taper QE…the market will at the margin see his withdrawal as one which prolongs unorthodox policy for longer – partly because it moves the more dovish Yellen up the favourites list for the new job.
So with Summers withdrawing from the Fed race, the two other top contenders mentioned by President Barack Obama for the Fed job are Janet Yellen and Donald Kohn, the Fed’s current vice and previous Fed vice chairpersons respectively. A number of media reports suggest that it's still possible that Obama could turn to other "dark horse" candidates such as former Treasury Secretary Timothy Geithner or former Fed Vice Chairman Roger Ferguson. Geithner though was quoted this morning reaffirming his disinterest in leading the Fed (WSJ).
Marketfield’s Michael Shaoul calls the Summers announcement noise:
We would also stress how unimportant all of this is over the medium to longer term. We never saw any great difference between Summers and Yellen since neither candidate seemed to recognize the degree to which FOMC policy has fallen behind the trajectory of the US economy. We also believe we have reached the point at which FOMC accommodation has started to actually undermine the foundations of the bond market, as the risks of an inflationary impulse start to grow in stronger portions of the US economy. We have also reached the point at which bond returns simply cannot keep up with equities, and even today’s rally in bonds seems likely to be a fraction of the gains for those enjoyed by the broad US equity market, which looks to be pushing further into blue sky territory.
Therefore while this morning’s violent rally may bring some much needed respite to those heavily exposed to the bond market it is likely to blow over soon enough and be replaced by another grind towards higher yields and lower prices as investment capital continues to head for the exits. Clearly the risks of an imminent breakdown in the bond market have diminished for the time-being, but we would still expect substantial difficulties to be encountered in the weeks ahead making this rally an excellent selling opportunity for those who remain over-exposed to fixed income.
And the taper? Let’s wait until Wednesday.
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