Fed to complete tapering next week and then new round of uncertainty

Outlook

At 10 am today we get the NAR existing home sales for September, expected up 1% at an an-nualized rate of 5.1 million (after a 1.8% drop to 5.05 million in August). For what it’s worth, builders are building at a faster pace in Connecticut despite what seems like a surplus of existing homes for sale. Existing home sales are not a number likely to move sentiment among the Feds, where hawks and doves alike are commenting on ending QE.

It’s all very confusing. St. Louis Fed Bullard indicated last week that delay would be okay, but then we got Boston Fed Rosengren and Fisher (the Dallas one, not the Vice Chairman, who is Fischer) saying tapering should remain on track. Some commentators think delaying would be sort of like Q4, and as long as we are using that term, maybe another true QE4 could be in the works. Well, to a certain extent the QE4 idea is hysteria over the stock market, but even if only a small minority think such a thing is possible, that it could be bandied about at all indicates the Fed is not doing a good enough job “communicating.” The preponderance of opinion is that the Fed will complete the tapering next week and then we are on to a new round of uncertainty.

We were taking the view that a month or a few months of delay wouldn’t matter much—the Big Picture is still the US hiking rates and the rest of the world (ex-UK) still in stimulus mode. But it’s not going to be that simple. We have to acknowledge that the Big Picture doesn’t always dominate. Besides, the mar-ket is all too familiar with dollar sell-offs and needs only the smallest of excuses, and it’s a whole lot easier to pare back positions when you are already long dollars. We haven’t seen a reversal to net short dollar positions yet, but honestly, that’s exactly the kind of perverse things we could easily get.

What would trigger such a strange outcome? Well, one idea might be restored confidence in Europe and the ECB. Confidence has been running on fumes but this latest story about the ECB buying covered bonds has some real potential. Is it a stealth move by Draghi? Is it the Bank of France getting the bit in its teeth and running away, with the ECB covering for it? What are they thinking over at the Bundes-bank? And what does this have to do with the banking capital adequacy and stress tests due this week-end? There is either a giant magic trick going on or a big fat mess, or maybe both.

We remain stunned that the world is not yelling at the top of its lungs about the ECB buying covered bonds reported yesterday. The FT report said “The ECB confirmed it began buying covered bonds on Monday. The central bank will reveal how much it has bought every Monday afternoon, starting next week. The purchases of asset-backed securities are expected to start later this year. The purchases in-cluded at least two Spanish issues, one German and one French, according to a person familiar with the matter, who added that the maturities ranged from one to six years. Two large French banks, BNP Pari-bas and Societe Generale, are thought to have sold bonds to the ECB. Société Générale declined to com-ment.”

And that’s it. No comments from officials, no outcry from the Bundesbank (yet), no research into who, what, where, when and why. If the ECB is stonewalling journalists, that’s news, too. The FT tried to delve into it and reports that two sources told it that corporate bond buying is not even on the December agenda yet. So—the ECB bought some covered bonds but doesn’t have permission or a mandate from members or the European Court of Justice to buy covered bonds. Buying covered bonds has been dis-cussed but talk is not accelerating or deepening and the subject is not on the ECB agenda. Huh? This is a real puzzle and it upsets the apple cart. Central banks are not supposed to be this opaque. Also a little weird is that Reuters and the FT own the story. Other press outlets are not even covering it. It makes us very nervous.

If the big boys are paring back, we should pare back, too. Evidently there is something on the horizon.