FOMC might be a non-event, even if it is Bernanke’s birthday

More John J Hardy, yesterday13 December 2011 Non-Independent Investment Research The FOMC may come and go without much fuss, but the voting composition will change drastically after today’s meeting. This is an odd market – lots of fear without very many out there expressing it.

Today saw relatively tight range trading after yesterday’s big swings, as the market is either awaiting the outcome of tonight’s FOMC meeting or simply biding its time for any other number of catalysts. US Retail Sales figures were rather downbeat and one of the more notable disappointments after a long string of very strong data.

FOMC PreviewWe’ve got a one-day FOMC meeting set for today, with a new monetary policy statement on the way at 19:15 GMT. Considering that this is a short meeting with no Bernanke press conference and that it will be the last meeting with the three hawkish regional Fed presidents as voters, it’s easy to believe that any major policy hints will await a likely less rowdy bunch of replacements from the regions. Then again, the other of the four voters who is about to become a non-voter, Evans of the Chicago Fed, recently actually dissented on the dovish side, outlining a particularly aggressive monetary forcing in the economy aimed at boosting unemployment through NGDP targeting – creating nominal growth regardless of inflationary consequences through monetary forcing.. It brought to my mind the image of force feeding geese to grow their livers for pate. We’ve yet to see other Fed members expressing enthusiasm for this “nuclear option”, but one wonders what a steep drop in core CPI readings early next year and an unemployment rate bounce back above 9.0% might do for Fed sentiment, should that come to pass. On that note, watch out for this Friday’s CPI release as the month-on-month core numbers have been creeping lower over the last two months, even if the year-on-year levels are near 3-year highs.

Of the four new voters, only one is known to be a hawk, and even if he – Lacker of the Richmond Fed – is a rather outspoken hawk, one wonders what will stop the doves in the New Year. The majority, at least, all seem pliable to the academic absolutism of the Mr. Bernanke and the belief that the Fed can always engineer a rescue with additional helicopter drops of cash/liquidity. But there are a number of forces that could stand in the way of further action from the Fed in the New Year: economic (continued stronger than expected growth and in particular improvement in the labour market or higher than expected inflation), political (stronger signs that the Fed will face resistance from Congress and/or the president. This has boiled up at times, but there’s not enough of a consensus, though it bears watching whether a presidential candidate from the Republican side, or especially from a third party picks up the blame-the-Fed rhetoric. It’s certainly low-hanging fruit for a protest/occupy movement) and financial (Fed unable to keep order across the entire yield curve, creating uncomfortably high yields out at the longer end of the curve. No signs of this at all so far, but worth watching for a bottom in the 30-year bond cycle of ever lower yields.)

Odds and endsThe Germany ZEW survey was a bit better than expected, though still extremely low by historic standards (only late 2008 and 1992 saw similar lows). The current situation component also declined to a 17-month low.

The UK Nov. CPI eased off just a bit, but the YoY number needs to drop back well below 4% to offer any support for the BoE’s stance of looking through high inflation levels. Fortunately for the BoE, gasoline prices have been fairly steady for the last few months and the year-on-year comparisons there could help the index fall back a bit.

The US Retail Sales number was decidedly weak, showing sales expanding half as fast as expected. This is particularly weak given the relatively early Thanksgiving this year (theoretically expanding the length of the US Christmas season.)

Looking aheadThe world is obviously rather underwhelmed with last week’s EU summit, but hasn’t exactly gone out of its way to express much dismay so far across markets. After all, EURUSD is only off a few figures from its recent bounce, the US equity market is still inside the range of the last seven or eight days, and bonds are firm, if not exactly rallying. There is an odd combination out there of plenty of fear, without many appearing especially willing to express it. That being the case, it appears the world is looking for a further catalyst to move the markets. The next obvious potential catalyst is the FOMC meeting up in a while, though it would seem that only a more hawkish than expected performance would trigger any real surprise and market volatility. The other potential catalysts this week are the eternal ad hoc announcements from EU officialdom in following up on last week’s summit and Euro Zone sovereign bond auctions (the Thursday Spanish auctions especially noteworthy.)

Stay tuned and stay careful out there.
Economic Data Highlights UK Nov. RICS House Price Balance out at -17% vs. -25% expected and -24% in Oct. Australia Q3 Dwelling Starts out at -6.8% QoQ vs. -1.0% expected and -4.1% in Q2 Australia Nov. NAB Business Confidence/Conditions out at 2 and 1, respectively , vs. 2 and -1 in Oct., respectively Sweden Nov. CPI out at