Watch Out! Taper Bomb is Coming.Guy Conger
Here in the lower 48 the big economic question is when will the Fed (U.S. Federal Reserve) begin to cut back on its $ 85 Billion a month QE program. Well I think the answer to that question is coming soon.
Here is my hypothesis
Bond prices have been plunging for several months, while 30-year Treasury yields just briefly tagged a 28-month high. This has been happening despite aggressive bond buying by the Federal Reserve.
You can expect the Fed to kill its QE program within the next few months.
That bond market sell-off is leaving fixed-income investors with the worst annual losses on bonds since 1999.
It also proves beyond the shadow of a doubt that the bond market is more powerful than the Fed. If investors want out of bonds — due to fears of inflation, stronger growth, huge debts and deficits, massive foreign and domestic fund outflows, and so on — their selling will ultimately overwhelm any QE program the Fed can cook up.
Now, against that backdrop, the Fed is about to hold its last policy meeting of 2013. On Dec. 17 and 18, policymakers will gather around a conference table in Washington and decide whether to continue their $85 billion-per-month QE program.
My guess is they will decide to announce the beginning of Taper by lowering their purchases by $10 million.
The reason I’m convinced this will happen is as always the numbers. Consider.- The most important recent report was the official November jobs numbers. It showed the economy creating 203,000 last month, well above consensus estimates in the high 100,000s.
More importantly, the unemployment rate dropped to 7 percent from 7.3 percent. That was far below the 7.2 percent that was expected and the lowest since November 2008. Average hourly earnings also rose 0.2 percent, while average weekly hours worked ticked up to 34.5. Finally, the diffusion index, which measures how many companies are adding workers versus cutting them, rose to 63.5 from 61.1.
And yesterday, we learned that retail sales surged 0.7 percent in November. That was faster than expected, an increase from the upwardly revised reading of 0.6 percent in October, and the biggest gain in five months. Strong retail sales should alleviate some of the concern that was out there about the buildup in inventories during the third quarter.
Also, the separate “JOLTS” report (which incoming Fed Chairman Janet Yellen closely follows) that the Labor Department puts out every month showed job openings hit the highest since May 2008 in October, at 3.925 million.
Weekly jobless claims also just plunged back below the 300,000 mark, putting filings for unemployment assistance back near their lowest levels since 2006-2007. That provides even more evidence of a firmer tone to the labor market.
In response to all the stronger data we’ve seen lately, noted centrist James Bullard of the St. Louis Fed strongly hinted at an imminent taper in a speech this week. He joined more hawkish members, like Dallas Fed President Richard Fisher, who just warned that “we at the Fed should begin tapering back our bond purchases at the earliest opportunity.”
the Fed’s last major excuse — fears of another fiscal foul up in Congress — is being taken away. Congressional leaders worked out a federal budget deal this week behind closed doors. So there will be no threat of a government shutdown.
Even if all that data doesn’t push the Fed to begin the end of Tapering before the New year it will definitely turn all the doves into hawks and I predict Tapering will begin sometime soon in 2014