Does the Federal Government Keep up With the Economy

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The week started with stock indexes looking strong ahead of the 9:30 open and interest rates relatively unchanged from Friday’s closes. This week is Fed week with the FOMC meeting ending Wednesday afternoon with the release of the policy statement immediately followed by Bernanke’s press conference where he will face questions on details about his thinking on when or if the Fed is going to begin taking the punch bowl away. IN the last month the view that the Fed will begin tapering has gained a lot of momentum. After the strong April employment report in early May the idea the Fed was about finished supporting the rate markets increased geometrically and rates shot higher catching many investors flat footed as well as most large mortgage companies that were not properly hedged, expecting the fed was going to keep buying. The 10 went frm 1.63% to 2.23% in a month (currently 2.14%). Last week as current economic data was reported slightly weaker than estimates and as the FOMC meeting came closer some of the strong comments that the Fed would begin tapering this summer began to wobble. Easy to have a strong opinion when prior to the Fed’s decisions, as the time closes in though most convictions become less solid. The thought that the Fed will not taper soon has increased as the rate markets have become somewhat disorderly with the constant selling, as rates continue higher some believe the Fed will hang on for now in order to keep mortgage rates frm increasing much more. Increasing mortgage rates, if they were to continue to climb as rapidly as in the last m month, may derail the strongest sector of the economy is supporting the idea the fed will say it isn’t about to reduce the buying in the near future. A very difficult call to make about what Bernanke will say or do; the openness that the Fed has supported for Fed officials to speak their minds has certainly stirred the pot with a lot of different opinions. ….“If you think the Fed or government agencies know what is going on with the economy, you're mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn't make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy. Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn't even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon”…. By John Mauldin  Jun 15, 2013, Thoughts from the Front Line. This morning at 8:30 the June NY Empire State manufacturing index was a lot stronger than forecasts; the index as reported jumped from -1.43 (contraction under zero) to +7.84, forecasts were for an increase to 0.5. Global stock markets rallied overnight and US stock indexes were strong at 8:00 pointing to a 100 point increase in the DJIA at9:30, the Empire State index had little impact on the strength of futures trading as orders, sales and employment dropped even though the headline was better.    At 9:30 the DJIA opened +109, NASDAQ +29, S&P +11; 10 yr note 2.13% -1 bp and 30 yr MBS price +5 bps. At 10:00 the June NAHB housing market index was expected at 45 frm 44 in May; a huge increase to 52, the first time the index has been in positive territory (over 50) since April 2006 and it is the biggest month-to-month increase in the index since 2002. No immediate reaction to the strong index reading but it does continue to support the expectations for the housing sector. The NAHB data did not mention anything about the increasing mortgage rates. The big gain in the index is attributable to the lack of inventory according to the report. From the technical view the bond and mortgage markets remain bearish with about every study and model we use has yet to improve to even the slightest bullish readings. It isn’t so important now with the FOMC meeting on Wednesday. We are not expecting much change in the bond and mortgage market until at least Wednesday afternoon when the FOMC policy statement and Bernanke’s press conference occur.