Tuesday, March 18, 2014

Markets are watching Yellen not Putin

By Phil Flynn

Forget Crimea and bring on the Fed. While Vladimir Putin mocks President Obama it seems that the markets want to forget about those risks and focus on the Fed and whether or not Janet Yellen can be tougher than the President.  Janet’s first job is trying to rephrase the Fed's 6.5% jobs target and to send a signal that it is just not about a number but about a slew of data. We all know that the Fed had previously indicated  that the unemployment rate would need to go down to  6.5% before they would even think about raising interest rates, but that rate is far from sufficient in an economy where the jobs that are being created are a far cry from the jobs that were lost.

Stocks rallied hard after a big rebound in industrial production that perhaps indicated that the weakness we saw was energy related. Factories that had to interrupt their natural gas slowed production and now are playing catch up.  While the market hopes this is a trend but it will assure us that the Fed will not waver from the taper.

We know it will be tough to back off the $10 billion dollar taper but the real challenge may come when it is the right time to raise interest rates. Even more important may be when the Fed starts unwinding its ever growing balance sheet.

Of course the Fed should start to admit that there are consequences to their actions and yes tapering is a form of tightening. If you don't believe it, talk to the emerging markets who feel like the Federal Reserve left them hanging out to dry. As I have said before it seems the first steps in removing extraordinary stimulus may not be so painless after all. The global economies tried to keep a stiff upper lip but now is feeling pain as the Band-Aid starts to get ripped off.

The Federal Reserve's failure to acknowledge the emerging markets in its statement is hurting some feelings and some emerging market balance sheets. The Fed also failed to acknowledge that quantitative easing caused the emerging markets to blow bubbles and live beyond their means now have to deal with a world post hot money. Instead of dealing with the massive inflows as the United States started to deleverage, they now have to deal with the outflows unmasking the ramifications of being the Fed's economic dumping ground. Now the question is whether or not the Fed can continue to ignore the turmoil in the emerging markets and rely on our own rebounding economy or will it come back to haunt us.

China of course is a reason why oil is faltering.  Oil was getting weighed down led by RBOB and a rise in refining margins. OPEC is producing like crazy and wants to hang onto market share and maybe develop new customers that are being held hostage to a country that is using its energy advantage as a weapon to invade its neighbors.

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