What The Fed Balk Implies About The Jobs Report, ECB And Economy

by: Markos Kaminis

The Federal Reserve's Federal Open Market Committee (FOMC) effectively stood still today and left the market to its own devices. It will continue to support economic activity through low rate targeting of course. The FOMC said it would also "continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities."

However, stocks moved lower after the release, because no new initiatives were begun. The SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and the PowerShares QQQ (QQQ) were relatively unchanged on the day, but you can see here the dramatic reaction of the SPY at the announcement. I want to remind investors that the Fed basically met expectations with its inaction today, as most economists' views I know of are looking toward September for new Fed action.

Chart forSPDR S&P 500

What is the Fed implying? 3 issues are relevant in my view. One, none or all may be at play.

Some are speculating that the Fed could be privy to the monthly employment data, to be released Friday, and the information contained therein affected its non-action Wednesday. Wednesday's ADP Private Employment Report indicated Friday's jobs data would be solid, but ADP has cried wolf (or dove) before. If the Fed knew about a pending deterioration in labor, it wouldn't want to precede that information with its own action, as that could dilute its impact on the economy (if it has one). I don't think this depiction is true to reality, but you never know.

There's a very important European Central Bank (ECB) announcement scheduled for Thursday, so some might speculate that this is in some way playing on that. If the ECB acts as dramatically as Mario Draghi sounded it might, I would say the likelihood of Fed action increases. That's because our economy needs help of some sort, and the dollar will seem to some to have more leeway in that case. So while the Fed may not be waiting on outside action, it's not difficult to imagine it waiting a bit longer as the situation evolves and clarifies. The US dollar strengthened on the Fed balk, with the PowerShares DB US Dollar Index Bullish (UUP) rising 0.7%. The SPDR Gold Shares (GLD) dropped 0.8% on the news, as 24-hour spot gold prices dropped. Spot gold was $1600.50 per troy ounce at my check at 4:27 PM EDT.

The FOMC indicated that economic growth had decelerated over the first half of 2012, but it maintains that it will continue to grow and even pick up gradually over time. This to me sounds hopeful, and seems to completely ignore the economic data I'm seeing. However, the Fed never acts proactively. In its cautious movements though, it tends toward intensifying reactionary actions - sort of like how a driver reacts when his vehicle slides. This often leads to a fishtailing, and in Bernanke's case, I feel like an economic fishtail will result eventually in a turn the other way toward high inflation or stagflation. The Fed doesn't see any inflation though, but you can bet that when it does, it will be too late to stop it.

The Fed's actions reach the financial sector first, and the initial reaction of important representatives weighed against its decision pretty unanimously Wednesday.

Company & Ticker

Tuesday's Performance

Financial Select Sector SPDR (XLF)


Bank of America (BAC)


Citigroup (C)


J.P. Morgan Chase (JPM)


Morgan Stanley (MS)


Goldman Sachs (GS)


Wells Fargo (WFC)


PNC Financial (PNC)


TD Bank (TD)


M&T Bank (MTB)


KeyCorp (KEY)


BOK Financial (BOKF)


T. Rowe Price (TROW)


State Street (STT)


Janus Capital Group (JNS)


Calamos Asset Management (CLMS)


MetLife (MET)


Chubb (CB)


The Fed ominously stated today, "...strains in global financial markets continue to pose significant downside risks to the economic outlook." That seems to directly implicate Bank of America, Citigroup, Morgan Stanley, J.P. Morgan and Goldman Sachs based on what we already know about such exposure.

In conclusion, it seems what the FOMC is implying is that it will continue to be reactionary, overreaching, and in the end, perhaps destructive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.