The Kremlinologists turned out to be right, and the Federal Reserve left its “considerable time” language in its statement to assure the markets that it would be around for a while longer with rock bottom rates. It’s the divergent (to a point) reaction out of the markets themselves that is interesting to parse, and will be key to watch in coming weeks and months. The action in the stock market was to suggest the entire exercise was a snooze-fest, with stocks ending marginally higher (yes, the Dow at a new record) but not too far from where the major averages were trading just before the news. Which is to say the equity market, always the most optimistic of U.S. markets, has it in mind that low rates stay for now, and until “now” is “then,” it’s time to party.
It’s all over but the dissection of the Fed statement, due later today, which will follow with a Janet Yellen press conference after the U.S. markets get word of whether the Fed did or did not eliminate the “considerable time” bit from its statement that saw markets go into a tizzy all of Tuesday. At this point the market believes that phrase now may *not* be eliminated, which marks the second reversal in about a week on this point. No matter what, somebody is going to be caught leaning in the wrong direction, but if the latest intelligence is that the Fed’s statement won’t change materially until the October meeting, then the freshest bets are probably in the direction of those betting on that much. So if the statement does cut out that language or modifies it in any way, you could see a selloff in equities, the dollar and bonds.
The markets ease into a traditionally slow period with not much to look forward to other than the Federal Reserve’s Jackson Hole conference due next week, where the highlight, naturally, will be anything Janet Yellen says regarding the state of the labor markets. The chances of the Fed signaling a new shift when it comes to policy are slim – Yellen has proved to be a cautious speaker thus far, interested in furthering Ben Bernanke’s way of telegraphing as much as possible when it comes to policy alterations, and Yellen is more so, her “six months” comment from a few months ago notwithstanding. As Jonathan Spicer and Howard Schneider reported a few days ago, Yellen is much more interested in fighting an inflation war than dealing with a persistent deflationary/lousy economic environment to dominate the headlines, so the expectation should be for lower rates for longer, and not to expect a lot of surprises out of Wyoming next week.
To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.
Rants from TV commentators aside, the market’s going to be keenly focused on Janet Yellen’s congressional testimony today, with a specific eye toward whether the Fed chair moderates her concerns about joblessness, under-employment and the overall dynamism of the labor force that has been left somewhat wanting in this recovery. The June jobs report, where payrolls grew by 288,000, was welcome news even as the economy continues to suffer due to low labor-force participation and weak wage growth.
The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.
The market’s recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.
After the world’s most boring jobs report in history (seriously, misses consensus by 1,000, unemployment and wage growth in-line with expectations, and revisions over the last two months amount to a total decline of 6,000 jobs, which is a pittance), the bond market is catching a bit of a bid again. That shouldn’t be a surprise given the way this market is still taking its cues from the European bond market, which is soaring on what would otherwise be a quiet Friday. (Those of you who read Richard Leong’s story yesterday noting the likely rally in bonds post-jobs would have been all over this – just sayin’.)
Investors will get a look at the Federal Reserve’s thinking later on Wednesday in an otherwise quiet week when the Fed releases minutes from its April get-together. There may be a bit in the way of more up-to-date thinking in some of the scheduled Fed speeches, notably Bill Dudley of the New York Fed, along with Fed Chair Janet Yellen later in the week.