Low rates for a "considerable time" is still good guidance

Outlook:

We get a lot of housing data this week--existing home sales tomorrow, the FHFA’s Aug House Price Index on Thursday, and new homes sales on Friday, plus builder earnings this week. Tonight Chinese GDP data is due. At the end of the week (Sunday), the ECB bank stress test report is due. After that, the next big thing is the Fed’s policy meeting on Oct 28-28.

Boston Fed Pres Rosengren said the Fed should continue completing the taper on schedule, regardless of financial market gyrations, and probably not even change its “communications” stance—low rates for a “considerable time” is still good guidance. The obnoxious Krugman in the NYT says nobody can under-stand stock market gyrations, least of all the Fed, and accidentally supports ending tapering. Evidently he didn’t see the capital flows reports in the FT and elsewhere showing a big outflow from Europe and from equities and into the US and Treasuries.

The data can be a little confusing, but as far as we can tell, there was frenzied buying of US government debt, with ICAP reporting an all-time high of $946 billion in volume, more than 40% above the previous record. In addition, According to the Bloomberg story, “About 11.9 billion shares changed hands on U.S. equity exchanges on Oct. 15, the most since the European debt crisis of 2011.”

An analyst told Bloomberg “Whenever people can’t sell their illiquid assets, they turn to the U.S. stock market because everyone is involved in it and that’s what they can sell. That’s why the market selloff was so sharp. You sell what you can, and the deepest, most liquid asset in the world is U.S. stocks.” Moreover, “Corporate bond values are fluctuating the most in more than a year as Wall Street’s biggest banks opt against using their own money to absorb debt being sold by clients. The 22 dealers that do business with the Fed reduced their net holdings of high-yield bonds by $1.7 billion in the two weeks ended Oct. 8 to a net $6.3 billion, Fed data show. They were joining the crowd in selling, with high-yield bond mutual funds receiving $7.4 billion of withdrawals since mid-September, according to data compiled by Wells Fargo.”

Similarly, the FT report, using data from BoA/Merrill Lynch, a record $5.7 billion outflow from Europe-an equity mutual funds and ETFs in the week ending October 15. Here’s the confusing part—the FT says the US also had a record outflow, but Reuters says US equity funds had an inflow of exactly the same amount, $8.1 billion. The implication seems to be outflows from easily sold equities into bonds everywhere but some re-allocation from European equities to US equities at the same time. Also, emerg-ing markets lost 0.3% in the latest week but year-to-date, the outflow is a whopping $5.8 billion.

Note to Readers: We have jury duty next week tomorrow, Tuesday 10/21. If we do not get a mes-sage Monday night that we are excused, there will be no reports on Tuesday.