Consenus: MBS tapering unlikely in 2013
Market remains too fragile for tapering, analysts say
The Federal Open Market Committee will release its final meeting minutes for 2013 on Wednesday, revealing its final announcement on the potential of quantitative easing for the year.
"I think we are still at a very fragile point. The Fed has achieved some of the cooling off that it was trying to achieve through the events that happened in May,” said Ron D’Vari, CEO and co-founder of NewOak Capital.
"On top of that, you have the new rules kicking in 2014 on Jan. 10 on underwriting, and you will see some of the smaller originators falling. There is a lot really hanging for me to think that the Fed's first reaction would be to act on QE," D’Vari added.
The most recent jobs report recorded the U.S. unemployment rate falling to a five-year low of 7%, prompting market analysts to predict a tapering decision from the Federal Reserve.
In light of the recent economic reports, analysts with Goldman Sachs (GS) said, “Fed officials face a more difficult decision at their meeting next week, as the employment and growth data have picked up since the October meeting. But our central forecast for the first tapering move remains March, with January possible as well."
While the strongest argument for a December taper lies in a strong jobs report, payroll growth is not the sole variable, with labor force participation falling at a rate faster than is consistent with a purely demographic explanation, Goldman Sachs said.
"The result is that by our estimate the total employment gap has not narrowed in recent months. Supportive of this view that the labor market retains considerable slack, wage growth has also remained modest," Goldman analysts added. "The overall impression is that the labor market is improving a bit more quickly, but remains far from normal."
According to D’Vari with NewOak Capital, the economy needs a much better employment picture, and quality employment as opposed to lower-paying jobs.
"It is not just the number. It ultimately comes down to whether the job market looks more free and open and there is more confidence involved. Consumer confidence hinges hand-in-hand with people knowing their jobs are safe," D'Vari said.
Goldman Sachs attributed the unlikelihood of tapering in December to three variables: Inflation remains well below the Fed’s 2% target; Fed officials will want to offset the first taper with a strengthening of the forward guidance; and a December taper would constitute a hawkish surprise to current expectations.
The Fed will have to make sure the effects of QE inch up instead of going up by yards to avoid shaking up the markets, D’Vari said.
In the end, D’Vari said, “The data is not there. On the surface it looks good and the markets have come back because of the Fed. But the real data is not there.”
Meanwhile, the market remains hinged on the eminent news.
"[The markets] vulnerability on the hoped-for influence of short-rate policy is higher than usual on this particular topic because liquid money market futures suggest forward guidance is working just fine at the moment,” FTN Financial said in its weekly report.