"The Committee sees the improvement in economic activity and labor market conditions ... as consistent with growing underlying strength in the broader economy," the FOMC says, adding that the decision to scale back QE by $10B per month is based on "the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions."
Although the Committee says it will "likely reduce the pace of asset purchases in further measured steps [should] incoming information support [the] ongoing improvement in labor market conditions and inflation moving back toward [the] longer-run objective," the Fed notes that asset purchases are "not on a set course."
FOMC also says it "anticipates .. that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%."
Updated FOMC projections: 2014 PCE inflation now seen at 1.4-1.6% (from 1.3-1.8% in September); 2014 GDP now seen at 2.8-3.2% (from 2.9-3.1% in September); 2014 unemployment rate now seen at 6.3-6.6% (from 6.4-6.8% in September). Full release
10-year yield is at 2.91% versus 2.87% just prior to the announcement.
Dow (DIA +0.9%), S&P (SPY +0.6%), and Nasdaq (QQQ) all staged brief rallies on the news but have since retraced a bit. Gold (GLD +0.3%) fell sharply initially but recovered.
The 10-year Treasury yield rises 3 basis points to 2.87% after November housing starts' surprising rise to a seasonally adjusted rate of 1.091M, 22% above the revised October rate of 889K, and up 29.6% from a year ago.
Of that 1.091M, 727K were single-family starts, up 20.8% from October.
Building permits of 1.007M were 3.1% lower than October, and 7.9% higher than a year ago. Single-family building permits of 634K were up 2.1% from October.
The U.S. House overwhelmingly approves (332-94) a two-year budget framework spearheaded by Paul Ryan and Patty Murray that would remove the threat of a shutdown during the period. The eye-to-eye across the aisle comes as somewhat of a surprise and a rarity amid the rancor that has gripped budget battles in the past 2 years.
John Boehner noted that the measure amounted to a small step toward the GOP's goal of deficit reduction: "Is it perfect? Does it go far enough? No, not at all," he said, while urging colleagues to support the plan. Democrat Chris Van Hollen: a "small positive step forward."
The deal now goes to a Democratic Senate, which is expected to sign off as early as next week.
Treasury prices are paying attention to the big retail sales beat, not the massive jump in initial jobless claims. Down to 2.84% earlier, the 10-year yield is now ahead two basis points on the session to 2.87%. Stock index futures remain marginally lower.
The jobless claims data (they plunged to 298K last week only to soar to 368K today) clearly reflect seasonal adjustment issues surrounding the holiday season.
The chances of the taper have increased thanks to the recent labor market data, says St. Louis Fed chief Jim Bullard, but below-target inflation remains an issue. "There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed,” he says. “A small taper might recognize labor market improvement while still providing the Committee the opportunity to carefully monitor inflation during the first half of 2014 ... Should inflation not return toward target, the Committee could pause tapering at subsequent meetings."
Like John Williams last week, Bullard suggests a change in forward guidance may be in order to convince markets the taper and a rate hike are two separate issues.
Treasurys remain little-changed on the session, the 10-year yield off a basis point to 2.85%.
“There’s tremendous deflationary pressure in the U.S.,” says Mizuho Asset Management fund manager Yusuke Ito. “For bonds, the longer the maturity, the better." As U.S. investors exit duration in the domestic bond market, Japanese investors - to whom the U.S. 10-year yield of 2.84% looks positively towering - are snapping the paper up. The country's holdings of U.S. debt rose $98.2B in Q3, the 2nd largest increase since the data started becoming public 13 years ago.
“The Japanese have experience with 15 years of disinflation,” says Hideo Shimomura, chief fund investor at Mitsubishi UFJ. “Now it is spreading to the U.S. It’s worthwhile to take long-end risk in portfolios.”
The jobs report definitely puts the taper on the table in December, writes Jon Hilsenrath, but it's not all good news. The household survey - out of which comes the UE level - shows the jobless rate fell from 7.2% in September to 7% in November, but employment rose just 83K against a decline in the labor force of 664K. Another way of saying this is the labor force participation rate fell to 63% last month from 63.2% in September (and 63.6% a year ago).
While this probably won't stop the taper, it could mean a change in guidance, says Hilsenrath, where the FOMC either places less emphasis on the unemployment rate (there's already evidence of this) or indicates it wants to see headline UE at less than 6.5% before considering rate hikes.
Communication success: Markets are finally believing tapering does not equate to tightening. As investors braced for the taper in September, they also priced in the Fed's first rate hike by the end of 2014. Braced again for the taper today, futures markets aren't indicating the first rate hike until late in 2015.
It's clear the Fed wants out of QE, says Bill Gross, appearing on Bloomberg Radio following the big jobs number beat. He puts the odds of the taper beginning in December at 50/50.
He adds that yesterday' fast GDP number combines with today's jobs print gives the FOMC the excuse to transition from QE to forward guidance. Earlier this week, San Francisco Fed chief and Yellen ally John Williams suggested the same thing, and floated the idea of the Fed altering said guidance to prove to markets it's in no rush to hike the Fed Funds rate.
Treasurys have gained back some of their knee-jerk losses following the report, but the 10-year yield remains 2 basis points higher on the session at 2.9%. The Dec 2016 Eurodollar contract is off 6 bps to 97.88, suggesting a Fed Funds rate then about 200 basis points higher than it is today.
The 10-year Treasury yield jumps to 2.92% following the jobs numbers beat and the far bigger-than-expected dip in the unemployment rate to just 7%. The government shutdown apparently affected this month's speed of decline in the UE rate, but not the level - i.e., it would be at 7% no matter the shutdown, but the furlough and then return of workers caused all of the decline to occur in the November report.
Stock index futures remain about where they were, the S&P 500 (SPY) +0.5%.
Gold (GLD) is off 1.25% to $1,216 per ounce and the dollar jumps, with UUP +0.5% premarket.
Initial jobless claims fell 23K to 298K last week, but the Labor Dept. says it's difficult to adjust claims for the holidays.
The big revision higher in Q3 GDP growth - to 3.6% from 3.1% - comes as private inventory growth's contribution is revised to 1.68% from 0.83% previously estimated, and from 0.41% in Q2. Real final sales (GDP less change in private inventories) grew 1.9% in Q3 vs. 2.1% in Q2.
Real personal consumption expenditures +1.4% vs. 1.8% in Q2. Real nonresidential fixed investment +3.5% vs. 4.7%. Real federal government expenditures of -1.4% vs. -1.6%. Price index +1.8% vs. 0.2% in Q2.
The 10-year Treasury yield is higher by 3 bps to 2.87%. TLT -0.3%, TBT +0.7%.
"Investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth," writes Bill Gross (BOND) in his monthly letter. "If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin - astute active investors like PIMCO, Bridgewater and GMO - will begin to prefer the comforts of a less risk-oriented migration."
"Deep in the bowels of central banks, research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE."
What Gross and Pimco are most confident about and what they're betting on is the idea the Fed will maintain ZIRP at least until 2016. "Front-end load portfolios. Don’t fight central banks, but be afraid."
November's PMI read of 57.3 is up from 56.4 last month, and the highest print this year. Leading is a 3 point gain in New Orders to 63.6 and a 2 point gain in Production to 62.8. Supplier Deliveries curiously fell 1.5 points to 53.2 (drones?).
Contrarian Treasury bulls will delight in knowing banks are trimming their holdings of U.S. government debt for the first time in six years. Now owning $1.8T of Treasurys (vs. 1.89T a year ago), banks' holdings of government paper of less than 70% of cash is the lowest since the Fed began compiling the data in 1973.
Citigroup cuts its Treasury holdings 10% this year to $82.6B. Bank of America cut by 88% to just $2.97B.
“Like a lot of other people who have been moving out of fixed income, it’s largely to avoid the fallout from tapering," says Thornburg's Jeff Klingelhofer. Yes, but what about the possibility banks are finding more profitable things to do besides lending to the government? Not so at least at the community bank level, says consultant Jeff Caughron. "Lending has not picked up a great deal ... (community lenders), by and large, are taking advantage of the steeper yield curve and putting more money to work in the bond market.”
"People are absolutely freaking out about interest-rate risk," says Jeff Gundlach, sitting down with Robert Shiller to size up the investment landscape. Ever the contrarian, Gundlach suggests last year's 1.4% low in the 10-year Treasury yield could still get taken out. The catalyst? "You never know until after the fact; otherwise, it would be priced in the market. But there is no inflation."
The see "freaking out" in a picture, check out the price charts of the mortgage REITs, particularly the two proxies for riding the long end of the curve - Annaly (NLY) and American Capital Agency (AGNC). Gundlach: "You can take advantage of pockets of opportunity in what people don't want ... If you're willing to take the interest-rate [risk], you can get yields of 11% in the agency mortgage market."
Constructive on housing (but not homebuilders), Gundlach is also bullish on non-agency mortgage paper, calling it the cheapest sector in fixed income on a risk-adjusted basis. Fans of also beaten-up non-agency mREITs like American Capital Mortgage (MTGE), MFA Financial, Dynex (DX), and Two Harbors (TWO) may want to take notice.
The small decline in the Chicago PMI to 63 comes after October's big jump to a 31-month high of 65.9. "Having kept inventories lean for so long, a pick-up in demand has led to a sharp rise in stock building among the companies in our panel. And to handle the latest production and new orders boost, companies are hiring at the fastest pace for two years,” says MNI Indicators' Philip Unglow.
The data combined with a better-than-expected print on Consumer Sentiment is enough to send Treasurys into the red for the session, TLT -0.2%, TBT +0.4%. The 10-year yield gains 3 basis points to 2.74%.