Taper Is No Longer the Issue

Wednesday, March 19, 2014

Pre-open sentiment remains positive as the markets wait for Janet Yellen’s first news conference as the Fed Chairwoman this afternoon. The weak start to the Q1 earnings season with underwhelming reports from FedEx (FDX), Oracle (ORCL) and General Mills (GIS) will also attract some attention.

We will get three things at the conclusion of the FOMC meeting this afternoon – the official statement, the committee’s economic projections and the Chairwoman’s press conference. No major surprises are expected on the Taper question or the projections, though given the recent downtrend in the unemployment rate, the committee’s projections for year-end 2014 and 2015 will likely come down to match private-sector consensus expectations. All indications are that they will continue with the recent $10 billion reduction pace on the Taper front.

The only major question is whether the FOMC will change the unemployment threshold for its forward guidance. The current threshold is 6.5%, not that far from the current unemployment rate if 6.7%. The last official FOMC statement and public comments from Fed officials have been emphasizing that they don’t intend to make any changes to monetary policy even ‘well past’ the unemployment rate reaches that level. The committee would prefer to replace the hard numerical threshold with something more qualitative without disturbing current market expectations in any negative way. The market expects interest rates to start rising in the second half of 2015, as reflected in the Fed Funds futures market. It wouldn’t be easy for the Fed to remove the unemployment threshold without disturbing market expectations, but that’s the key challenge.

Beyond Fed related matters, the 2014 Q1 earnings season got underway with the Oracle and Adobe results after the close on Tuesday (we count all companies with fiscal quarters ending in February as part of our Q1 tally). While Adobe beat expectations, Oracle came up short. This morning’s results from FedEx and General Mills were also on the weak side, with both companies blaming weather for their weak results.

Overall expectations for Q1 remain low, having come down quite a bit over the last three months. Total earnings for companies in the S&P 500 are expected to be down -1.6% in Q1, a material drop from the +2.3% growth expected in early January. We should probably get used to the ‘reason’ cited by FedEx and General Mills this morning, as weather will likely appear repeatedly this reporting season.

Sheraz Mian
Director of Research

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