Watch For A Fed QE Taper Time-out

By: Sy_Harding

Good luck to new Fed Chair Janet Yellen and her expectation that the Fed can continue to taper back its QE stimulus at the current pace until it is completely gone by summer.

The economic reports say it is not going to happen.

In her optimism regarding the economy, expressed in her testimony before Congress this week, Yellen pointed to GDP growth hitting an average annual rate of 3.5% in the last half of last year, compared to only 1.7% in the first half.

Regarding the negative consequence tapering seems to be having on emerging markets she said in effect that the Fed is only worried about the U.S.

She shrugged off the recent dismal jobs reports, saying weather may have played a factor, only agreeing that employment is still far from satisfactory conditions.

However, the problems are not showing up only in the jobs picture.

As I noted in previous columns, it has been the unexpected widening of the U.S. trade gap, as exports decline and imports rise. It has been in the huge plunge of the ISM Mfg Index, and in Durable Goods Orders, factory orders, home and auto sales.

This week is was the negative surprise of retail sales being down 0.4% in January, and previously reported sales for December revised down from a gain of 0.2% to a decline of 0.1%. It was also not encouraging that within the report, online sales, which should be boosted by bad weather that keeps shoppers away from the malls, also fell in January, down 0.6%.

The Federal Reserve reported Friday that U.S. industrial production fell 0.3% in January, versus the consensus forecast for a rise of 0.2%. The production report would have been even worse except for a 4.1% surge in utilities output due to increased heating demand.

The initial estimate from the U.S. Bureau of Economic Analysis (BEA) was that the economy (GDP) grew at an annual pace of 3.2% in the 4th quarter, a number also noted by Fed Chair Yellen. However, the BEA subsequently revises the number monthly for several months as new information regarding the quarter comes in.

While Janet Yellen remains sanguine about the future, major Wall Street firms have slashed their economic estimates quite dramatically again this week, particularly after the disappointing retail sales report for January. They are continuing to cut their expectations not only for this quarter, but also for the fourth quarter of last year.

Barclay’s bank says the downward revision this week of previous reported retail sales in December subtracted another 0.4% from the firm’s already declining estimate for the fourth quarter, which now suggests a probable downward revision by the BEA to 2.2% “a full percentage point below the first official estimate of 3.2%”.

Michelle Girard, chief economist at RBS, says, “The running tally of probable revisions for fourth-quarter GDP point to a downward revision to 2.3%”.

Jan Hatzius at Goldman Sachs cut his 4th quarter estimate of GDP growth to 2.4%, and his estimate for the current quarter to 1.9% (it was at 3.0% just three weeks ago).

This week Credit Suisse economists reduced their estimates for the current quarter in 2014 from their previous estimate of 2.6% to just 1.6%.

It may not be good news for the economy. However, the stock market loves it.

After declining for five straight weeks in January and into early February on concerns about the negative effect the Fed’s tapering back its QE stimulus was having on economic reports, the stock market has rallied for eight of the last ten days, now celebrating each additional negative report.

What has happened to its concerns?

The deteriorating economic outlook has now reached the stage where each additional negative report becomes difficult for the Fed to shrug off, or blame on weather, and adds pressure for it to at least pause the tapering back of its QE stimulus.

In her testimony before Congress this week, Fed Chair Yellen did say the Fed is “staying the course unless the data turns decidedly negative.”

It is doing so, and the stock market probably has it right that Fed stimulus will remain on the table for longer than expected. Whether at this point that would be enough to reverse the U.S. economic slowdown, and global economic problems, may be another question markets may have to face later.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2014 Copyright Sy Harding- All Rights Reserved

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