FOMC Preview

January 30, 2013

Substantial market changes have occurred since the previous FOMC meeting seven weeks ago.

  • Quantitative monetary easing hasn’t prevented the ten-year treasury yield from rising 32 basis points to 2.02%.
  • The dollar has appreciated 9.4% against the yen but fallen by 3.5% against the euro.
  • The price of West Texas Intermediate crude oil has advanced a full dime, or 11.9%.
  • The Dow Jones Industrial Average has climbed 4.5% and is less than 2% below its all-time closing high of 14,165 on October 9, 2007.
  • The premiums of Ezone peripheral 10-year sovereign debt yields vis-a-vis German bunds narrowed by some 330 bps in the case of Greece, 155 bps for Portugal, 100 bps for Ireland, 80 bps for Italy and about 50 bps for Spain.

The above shifts reflect a less anxious global investor community and optimism that the Fed will be scaling down quantitative easing sooner than had imagined.  Minutes from the December 12 FOMC meeting have encouraged speculation that QE could end during 2013.  The statement that was released at that meeting had affirmed continuing long-term security purchases by the Fed of about $85 billion per month and retention of a 0-0.25% fed funds target band well after QE is terminated.  The December meeting will be most remembered for a fundamental switch in the framework of future rate guidance from a specified date to a data-driven algorithm.  To wit, officials do not expect to be raising rates before the jobless rate is below 6.5%, expected inflation over the coming year or two doesn’t exceed 2.5%, and longer-term price expectations stay well anchored. The statement from December acknowledged continuing economic improvement and an improvement in the labor market but called the jobless rate “elevated” nonetheless,  Slower business investment growth was noted, and the point was made that core inflation has been under its longer-run objective.

Investors are hoping for more explicit guidance on QE plans.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3096 82.76 2.08 13044 106.34
04/25/12 1.3226 81.37 1.97 13096 104.13
06/20/12 1.2693 79.28 1.66 12837 83.63
08/01/12 1.2300 78.10 1.49 13028 88.98
09/13/12 1.2895 77.43 1.72 13342 97.60
10/24/12 1.2948 79.75 1.77 13115 85.72
12/12/12 1.3082 83.24 1.70 13325 87.13
01/30/13 1.3555 91.05 2.02 13928 97.52

opyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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