Update: Equities Higher On Divided Fed Minutes

U.S. and European equities remain strong, holding onto their gains after minutes from the Federal Reserve’s last meeting were released several hours early, indicating that members continue to be divided over how long the central bank’s bond-buying should continue. The Fed released the minutes early after discovering that some copies had been sent by mistake to Hill staffers and trade groups on Tuesday.

Fed officials remained divided over how long they should keep buying bonds, according to the minutes of the March 19-20 meeting released Wednesday. The Fed said that one member wanted to slow the bond purchases immediately. A few more favored slowing the purchases at midyear, with the program ending later in 2013. Several others thought that if labor conditions improved as expected, the Fed could slow purchases “later in the year and stop them by year-end.” Two members indicated that the purchases might well continue at the current pace at least through the end of the year.

Despite the early strength in the markets, there is definitely concern on the Street that these remarks are sequentially more hawkish than the notes from January. As the minutes get digested, it may surprise traders that only two central bankers on the Committee see QE3 extending to year-end without any adjustment, for that implies a closing of the open ended program prior to 2014.  The horrible jobs report on Friday, however, has many convinced that there is no chance of reigning in Fed policy anytime soon.

Comments from the Street:

“There is always some concern in the market around early data releases. Some people were scratching their heads. But it does seem that this was accidental.”

FBN noted, “Although the overnight futures are standing in place as traders digest the headlines, I view the change in tone as unequivocally bearish even in consideration of the weak Jobs Report last Friday.  With the average intraday range for the SPX near 16 points, I suspect that an acknowledgement by investors of the central bank’s burgeoning interest in narrowing the window for a potential tapering  will create a short term negative inflection point as such comments threaten the primary source of asset appreciation over the past 4 years and will spook managers to pare their exposure aggressively.”

Michael Woolfold, Senior Fx Strategist at BNY Mellon noted, “Some members see a halt to QE by end, but we already knew that. The bigger story is that some people might be thinking about increasing QE rather than decreasing it. That goes with what St. Louis Fed President Bullard said recently, that we could have month-to-month changes in asset purchases based on the incoming data. Data has been weak lately, so that could mean we’ll see an increase from the current $85 billion a month.

Tom DiGaloma, Managing Director at Navigate Advisors noted, “All the discussion at the last FOMC meeting about the Fed tapering off its purchases was blown out of the water with Friday’s horrible jobs figure.”

Market Reaction to the Fed Minutes:

  • U.S. equities opened higher with the DJIA hitting fresh highs, and the S&P 500 retesting all-time highs.
  • Treasuries fell more, sending the 10-year up to 1.78%
  • Crude extended its losses with May WTI crude down -0.7% to $93.53/barrel
  • Gold extended its losses with Gold down $10.20, or -0.6%, to $1,576.10/ounce

 

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