Courtesy of Lee Adler of the Wall Street Examiner
The FOMC statement was virtually silent about The Taper, saying that maybe we will, maybe we won’t depending on the data. The Fed is clearly concerned about the market reaction, and probably had some inkling of weaker July economic data. However, QE has in the past been scheduled to total approximately the amount of net new monthly Treasury supply, which has fallen sharply in recent months. There’s now insufficient supply to absorb all the QE cash. Too much QE is fomenting an even bigger bubble in equities.
The Fed is well aware of this. It will continue to float Taper trial balloons in an effort to anesthetize the market so that it does not react when the Fed does cut QE. I think the first small cut is coming in September.
Obviously QE will continue at some level, and that’s still bullish, maybe just not as bullish as maintaining the current purchase rate would be. I’d want to see how the stock market’s technical picture stacked up before each announcement before venturing any tactical ideas. I cover that in the nightly Professional Edition market updates.
Meanwhile, Treasury supply will be light until the end of August, and especially light around the mid month settlement, when the Fed is also settling its MBS purchases. The huge surge of cash from the Fed will meet inadequate supply. That’s a recipe for continuation or even acceleration of the melt-up in stocks and it should be enough for Treasuries to temporarily find a bid.
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