U.S. Nominal and Real Long-Term Interest Rates
The Federal Reserve’s surprising decision not to reduce the pace of their asset purchase program may reinforce the importance of fundamental data during the upcoming week. Policy makers, looking for sustained improvement in labor and income data, will probably continue to focus on the reaction of interest rate sensitive sectors to the more than 120 basis point surge in long term rates. Meanwhile, even as sentiment indicators have improved, hard data, such as durable orders, industrial production and household consumption, continue to look shaky. Several large homebuilders will report earnings this week, which should provide fresh information about the sustainability of the recent improvement in the pace of residential investment. With that said, another “Quiet Fed Reason” was the possible government shut down and the negative consequences that it could have in the market place.
We strongly feel that the Fed missed a “free gift” opportunity to start the tapering process. We feel the market could have weathered it with a modest pullback. Now the Fed is trapped due to the loss of confidence with analysts and an unclear guidance of when tapering might be considered. We remain extremely cautious.
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