Of all the Fed’s communication tools, BofA notes that the minutes seem to be the most confusing to the markets. They should be “old news," Ethan Harris comments, and yet, investors look to the minutes for nuggets of insight. The result, in our view, is a steady stream of “head fakes” and a regular pattern of weakness in the bond market. The results are striking and more consistent than we had expected: the bond market sold off on 18 out of 20 days. Of course, this time could be different but the last 2 years of FOMC Minutes releases have seen bond yields rise on average 3.5bps (bonds are already 3bps higher in yield) and effective Fed watching these days appears mainly a matter of avoiding misleading messages and fading "misinterpretation" of their communications.
Via BofAML's Ethan Harris,
What we seem to have here is failure to communicate
Of all the Fed’s communication tools, the minutes seem to be the most confusing to the markets. They should be “old news.” They are released three weeks after the meeting, and they are predated by both the directive and, often, the Chairman’s press conference and other speeches. The FOMC tries to be as clear as possible about its intentions, using the directive and press conference to explain the views of the majority of voters. By contrast, the minutes present a confusing comingling of the views from the majority voters, dissenters and the nonvoters. Hence, before each release, we warn that the “minutes provide a platform for the hawks to protest against the current policy.”
The bond market regularly sells off on the minutes
And yet, investors look to the minutes for nuggets of insight. The result, in our view, is a steady stream of “head fakes” and a regular pattern of weakness in the bond market.
Table 1 shows the change in the 10 year yield on the days when the minutes were released over the last two years. The results are striking and more consistent than we had expected: the bond market sold off on 18 out of 20 days and the cumulative change on these 20 days was 63 bps. There is only one notable exception—August 22, 20121. On that day, the minutes signaled a strong likelihood of QE3: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of economic recovery.”
Of course, the market movements on these days are not purely due to a misreading of the minutes. At times, there is new substantive information. Moreover, on some of these days, other news may have also impacted the markets. Nonetheless, in our view the scale and frequency of the adverse movements seems hard to ignore.
The minutes are now one of our least favorite releases because of the scramble to find the market moving sentence. Often, it is in the main text. Thus, the biggest selloff was on November 20, 2013 when the minutes suggested that “the central bank could cut back on its bond buying program even if the job market does not improve dramatically” (CNN Money). However, sometimes, the zinger is buried in the appendix: on July 10, 2013, bond yields rose 5 bps when investors noticed an obscure sentence in the forecast discussion: “about half” of members had assumed that QE would be over by the end of 2013 in making their growth and inflation forecasts. At the time, we argued that the Fed would not put such an important signal in the appendix and that the assumption was a “place holder” used to develop forecasts for growth and inflation and not a serious policy prediction. Sure enough, the Fed did not even start to taper QE until December 2013.
Will history repeat itself?
It is very hard to anticipate the potential misinterpretation of the minutes this time around. Perhaps the bond market has adjusted to what appears to be inefficient pricing. However, we would not be surprised to see the market sell off on Wednesday afternoon. More broadly, in our view, effective Fed watching these days is mainly a matter of avoiding misleading messages. These include not just the minutes, but also the “certainty” of tapering last September, the 6.5% and 7.0% unemployment rate “rules”, and most recently the six-month “rule” for the first rate hike.
via Zero Hedge http://ift.tt/1erq4ce Tyler Durden