Markets Are Confused And Stupid, And Apparently People Don't Know How To Read
Price action in the stock market today tells you everything you need to know about the cognitive dissonance investors are experiencing right now.
Since around 2 p.m. ET, when the FT published a preview of this week's FOMC monetary policy meeting by the pink paper's Federal Reserve correspondent, Robin Harding, U.S. stocks have taken a sharp turn lower. The headline was " Fed likely to signal tapering move, " and the knee-jerk reaction was to sell stocks.
What is amazing about the market's reaction to the article is the lack of market-moving news actually presented to it.
Here's the lede: "Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85bn-a-month in asset purchases when he holds a press conference on Wednesday, but balance that by saying subsequent moves depend on what happens to the economy."
Now, anyone who follows the Federal Reserve (which in the investment community is pretty much everyone) will recognize both of these likelihoods as eventualities that have more or less already occurred. The Fed has been candid about the possibility of tapering back stimulus this year, but has also firmly stated that the outlook for tapering is completely dependent on the economic data.
This is thanks to the introduction of the Evans Rule in December, which ties the outlook for Fed monetary policy directly to specific numerical thresholds in labor market and inflation indicators.
Yet, just as they did last week when WSJ reporter Jon Hilsenrath suggested in a short blog post that Ben Bernanke would strike a dovish tone at the upcoming FOMC press conference, markets reacted forcefully to the Harding headline today.
With Hilsenrath's blog post, the problem is the same: no news, no quotes, no anonymous sources – nothing of interest, really, to anyone in the market who's been keeping up with the Fed.
Hilsenrath's post is more akin to "stating the obvious" – all he says is that when the Federal Reserve does decide to taper back the bond purchases it makes under its quantitative easing program, that won't mean that the central bank is anywhere near raising interest rates.
Again, anyone who was around in December when the Federal Reserve introduced the Evans Rule should already understand that this is simply codified into U.S. monetary policy.
Yet stocks and bonds, which have faced weakness over the past few weeks as taper fears have seeped into the market, both used the opportunity presented by the Hilsenrath blog post to rally.
Arguably, the Federal Reserve had a lot more use for leaking information to journalists just a few years ago, but that was before it launched a new communications regime focused on increasing transparency in monetary policy decision-making.
Now, with the introduction of the Evans Rule, investors should be focused on the data, not the musings of Jon Hilsenrath and Robin Harding.
(Of course, Hilsenrath and Harding remain must-reads for anyone serious about following the Fed. But it's strange to think that they are still moving markets in the way that they are.)
Harding said as much in a tweet after his article went up today and markets reacted:
Glad people are reading my Fed preview. I've been in the September taper camp for a while and I'd stick with that. http://t.co/IGytwIYvzZ
— Robin Harding (@RobinBHarding) June 17, 2013
But people need to chill out. The Fed does not leak anything to any journalist to steer markets - especially during blackout.
— Robin Harding (@RobinBHarding) June 17, 2013
Where does that leave us? As Pawel Morski put it in a tweet:
Pump a chimp full of amphetamines, put him in front of a Bloomberg and see if he doesn't fit straight in.
— Paweł Morski (@Pawelmorski) June 17, 2013
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