Sell-Side To Fed "Don't Leave Us Now"
In spite of the prime-dealers seeming agreement that SepTaper is most likely; judging by the plethora of talking-heads and research pieces hitting in the last few days, the idea that a Taper was a good thing (Tepper) and in fact indicates 'health' appears to be on the back-burner as almost every sell-side shop is out with a discussion of just how potentially bad things are macro-economically and that a taper should be off the table. Below is BofAML's Ethan Harris' seven reasons to delay the taper following today's "punch in the stomach for the economic recovery story" (and our 4 reasons why they can't or won't).
Even if housing is just leveling off, this a punch in the stomach for the economic recovery story. Housing is supposed to be at the core of the strong growth in the next couple years. And the timing of the weakness makes sense: it comes in the wake of a 100 bp rise in mortgage rates. Up to now, economists could shrug off any near-term housing weakness and stick to the strong momentum story. That confidence must be shaken.
Waiting for the world to change
The mixed housing data add to a growing list of reasons for the Fed to wait for more data before tapering:
1. Both growth and inflation data continue to come in below the Fed’s forecasts and they will likely revise their GDP and inflation forecasts lower at the September meeting.
2. The unemployment rate has moved closer to the 7% “indication” for ending QE; however, as we have argued and the minutes confirm, the Fed is only using 7% as a rough summary statistic for a broad-based recovery.
3. At the July meeting, just one meeting before the alleged certain tapering, the Fed showed no urgency. They had inconclusive debates about inflation, growth and financial conditions, and they had no discussion of the specifics of tapering.
4. Public statements by Fed officials have been similarly ambiguous. Time is running out.
5. The Fed has never said September is the month, they have consistently said “later this year” — that means at any of the next three meetings.
6. The Fed meets on September 18, right in the middle of what could be another nasty fight over the budget and the debt ceiling. A key reason for tapering is that fiscal risks are fading with the cliff behind us. But are they really fading or is this just a temporary lull in the fiscal fracas?
7. Last, but not least, the core of a bullish forecast — a solid housing recovery — is now in serious doubt.
But, as we have noted numerous times before; the "taper" is all about economic cover for a forced move the Fed has to make:
1. Deficits are shrinking and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly - and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time...
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