Omnipresent Fiscal Cliff headlines have been muting the impact of almost all economic events in the past several weeks. As expected, markets have essentially wised up to this and have, for the most part, raised their standards for market moving information regarding the Cliff. The same old political posturing is decreasingly causing the same sorts of swings that it did in mid to late November. Fool me once, stocks sell off precipitously. Fool me 17-18 times and stocks almost aren't selling off at all any more.
The more insidious effects of the Fiscal Cliff paralysis concern bond markets and today's FOMC announcement. There's been a tendency (here as well) to lean on the Fiscal Cliff uncertainty to explain all of the containment in bond markets. Following the election Treasury yields and stock prices fell in concert, and bounced in concert mid-month. When markets got back to business after the Thanksgiving holiday, stocks were generally improved while Treasury yields generally fell--not their normal correlation.
A lot of this can be accounted for with concurrent European events. Just as day to day movements between Stocks and Bonds are more likely than not to correlate with each other, so too is the Euro more likely than not to be moving higher when stock prices and bond yields are moving higher and vice versa. With Greece's latest bailout drama in the spotlight following the US Presidential election, all three markets were hooked up fairly well, but there was a notable divergence when Greece was finally taken (mostly) off the table. Here's a chart to help visualize the phenomenon:
So we know that the pop higher for the Euro near the end of November correlates with the tentative inking of the Greek bailout deal. That can explain the peakiness in European markets while domestic markets stay relatively more muted due to impending Fiscal Cliff concerns, but what about the break away from the pack on the part of Treasuries?
A recent Reuters article notes trader's caution surrounding the Fiscal Cliff as well as "year-end" buying:
Evidence of this caution was reinforced by J.P. Morgan's latest Treasuries survey, which showed 70 percent of the firm's clients were "neutral" or holding Treasuries equal to their portfolio benchmarks on Monday. Traders also tend to balance positions going into the year-end.
This is true, and does indeed account for some of the repression, but herein lies the insidiousness of the Fiscal Cliff: The Fiscal Cliff is insidious because it attempts to charm market watchers into believing that IT is the reason for the low, sideways, narrow range in interest rates and that it trumps any other considerations. This would probably be true IF it weren't for the fact that the FOMC's Treasury buying program is about to expire!
Considering the fact that the Fed can't simply "keep doing what it has been doing" with respect to selling shorter maturity Treasuries and buying the long end, then we're very likely looking at "new money creation" in order to finance the continuation of Treasury purchases. We don't know exactly what the amount will be and what portion of it will be new money, but the consensus is that the Fed can't cut back enough on Treasury purchases to avoid some printing. In other words, QE4 is what's on the table today, and past precedent suggests that QE, in any form, is a big potential market mover on the day that it's announced. It's certainly big enough to trump the uncertainty surrounding the Fiscal Cliff, even if it would have a greater potential impact in the absence of The Cliff.
Bottom line: don't let this afternoon sneak up on you. The Fiscal Cliff didn't want you to know this, but today's FOMC festivities are the best chance in almost a month to see more than 5bps of movement in 10yr yields (hard to believe that hasn't happened since moving from 1.67 to 1.60 on November 20th!).
In other, less consequential news, there's a brief spat of economic data this morning with Import/Export Prices at 8:30am, and the earlier-than-normal 10yr Treasury Auction at 11:30am. Barring the bizarre, neither will matter much in light of the FOMC Announcement, Forecasts, and Press Conference.
Live Econ Calendar:
Week Of Mon, Dec 10 2012 - Fri, Dec 14 2012
Mon, Dec 10
Tue, Dec 11
International trade mm $
Wholesale inventories mm
3-Yr Note Auction
FOMC Meeting Begins
Wed, Dec 12
Mortgage market index
Mortgage refinance index
Export prices mm
Import prices mm
10yr Note Auction
Thu, Dec 13
Initial Jobless Claims
Producer Price Index
Business inventories mm
30-Yr Bond Auction
Fri, Dec 14
Consumer Price Index
Markit Manufacturing PMI
* mm: monthly | yy: annual | qq: quarterly | "w/e" in
"period" column indicates a weekly report
* Q1: First Quarter | Adv: Advance Release | Pre: Preliminary
Release | Fin: Final Release
* (n)SA: (non) Seasonally Adjusted
* PMI: "Purchasing Managers Index"
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