For the balance of the QE years we have seen a relative disconnect in the fixed income and equity markets as easy money has artificially put pressure on the bond market yield (higher pricing) while at the same time encouraging one of the strongest stock market rallies on record. Much of the action noted here is currently being explained away by the pundits stating that withdrawal of QE doesn’t mean higher rates, in theory.
The FMOC continues to maintain its forward guidance of ‘very low rates for a considerable time’ has accompanied all the FOMC minutes reports since the start of QE tapering and has not been altered in any way since its inception. This is in the face of substantially better jobs data, stabilizing housing markets (though the price increases going to fast may have put a bit of a damper on this sector), record earnings, improving GDP (4.0 percent preliminary second quarter reading) and improving inflationary and confidence data.
As the sole dissenter of the latest FOMC report, the Fed’s Plosser showed concern about the forward guidance; “Plosser, a consistent critic of the Fed’s easy-money policies, cast the lone “no” vote this week, objecting to the Fed’s statement that borrowing costs will probably stay low for a “considerable time” after the central bank ends its asset-purchase program. Plosser said the pledge is no longer appropriate with the Fed “very close to achieving” its goals for employment and inflation” (click here to read the article from Bloomberg).
For the time being it would seem that we remain in a cynical time where many times bad news is good and good is bad. Until we can get the markets to stand on their own fundamentals then the continuity between markets will remain suspect at best. As is the case with most things, knowing this fact is half the battle as thinking and strategies must be adjusted accordingly.