• *FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
• *FED’S BROAD PRINCIPLES ON EXIT `STILL VALID,’ FOMC MINUTES SHOW
• *SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE

Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the ‘flow’ not the ‘stock’ that matters – as we have been vociferous about for years.

The exit seems closer than many expected…

Pre: ES 1666.5, 10Y 2.01%, Gold $1363.50, DXY 84.28

The key section from the Minutes:

 

 

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the  Committee’s economic objectives. Regarding the composition of purchases, one  articipant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the  conomy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.

FOMC May Minutes.pdf

The latest poll of Morgan Stanley’s top clients from across the world says it all.

Chief economist Joachim Fels tells us that not a single investor at the bank’s Florence forum thought the world economy would rebound with any strength later this year.

Just a quarter expect a return to trend growth. Some 57pc think there will be no escape from the “twilight” conditions afflicting the western world, and 20pc expect an full-blown global recession. That is a remarkably bearish set of views. Yet the same investors are overwhelmingly bullish on stocks and property.

This schizophrenic exuberance seems entirely based on the assumption that QE and central bank largesse will keep the game going, flooding asset markets with liquidity. Indeed, 80pc think the ECB will cut rates again, and half think it will have to swallow its pride and join the QE club in the end. >> Read More

The one headline we have been waiting for for over four years has just hit:

• BOK KIM SAYS WORLD MAY FACE RATE RISK IF U.S. EXITS FROM QE

Not when, if. And there you have it: if the Fed exits, the world (and most certainly Japan) gets it. Thus, for the sake of the children (who will have inhert about $100 trillion in debt but don’t worry: debt is an asset as some “analysts” will promise) Bernanke can never exit. QE…D

And since never is a litte longer than 2016/2017, at some point in the next few years Bernanke will be the proud owner of all marketable Treasury paper. All of it.

The grace period between February and mid-May, when the US spent like a drunken sailor without regard for even structural limitations, and raked up over $300 billion in debt, or said otherwise when it was without an official debt limit, is over as of this weekend as we reported, and starting Monday the clock has been reset and wound up to the amount of the debt previously incurred in the phantom period. Courtesy of today’s Daily Treasury Statement we now know that the new and improved debt target ceiling, at which the US immediately finds itself is:$16,699,421,095,673.60.

As a reminder, since the US is automatically at the debt ceiling where it was four months ago but magically got a a $300 billion reprieve despite all the talk of austerity because no bipartisan agreement could be reached, the total amount of US debt will not change until Labor day, at which point all the various Treasury gimmicks to incur less debt expire and either the US is forced to start prioritizing debt, or it defaults outright. >> Read More

In fact as the latest H.8 report demonstrates, as of the most recently weekly data, the Fed’s policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise.

This means that, as we expected several months ago, the only recipient of ongoing Fed money printing are not US banks, but foreign banks operating in the US. For those confused about the big picture, here is a chart showing the breakdown of cash held by big and small US banks as well as foreign banks, superimposed to total reserves created by the Fed since the start of the Great Financial Crisis. The correlation is 100%. >> Read More

Futures are down modestly in early Sunday trading, and one possibility for that is the story that came out after the bell on Friday in the Wall Street Journal from Fed whisperer Jon Hilsnerath titled Fed Maps Exit From Stimulus.

 The gist: The Fed is seriously thinking about how it might begin the QE winddown process.

Given the widespread belief that Fed stimulus is a major tailwind for the market, talk of QE winddown is invariably something of a negative.

In tonight’s “Closing Print” note, Mike O’Rourke from JonesTrading thinks the article’s existence is pretty significant.

He writes:

The WSJ’s Jon Hilsenrath published a story Friday evening titled “Fed Maps Exit From Stimulus – Timing of Wind-Down Is Uncertain, but Focus Is on Managing Unpredictable Market Expectations.”  We suspect the twitter taper caper on Thursday opened the window for the FOMC to provide some clarity as to where policy stands.  Here are some key questions.  Is this story important?  Can it be taken at face value and should markets move?  The answer is yes, yes and yes.  The WSJplaced the article prominently on the cover of the Saturday edition, so they believe they have an important story.  It is a Hilsenrath story, and in the post-recession QE era the Fed has used him to foreshadow almost every major monetary policy move.  Finally, in a tape where QE is the dominant theme, any indication of policy slowing or reversing course is meaningful.  >> Read More

Remember when JPM’s cuddly permabull Tom Lee called for a correction less than 2 months ago in a note titled “Stepping Aside Short-Term; Fade Strength and Look for Better Entry Point Around 1400-1450; Big Picture Constructive“? Apparently he did not take into account the $80 billion monthly hot money injection from the BOJ, which has made any fundamental analysis utterly irrelevant, and has completely destroyed any ability of the market to reflect reality or discount any other future other than that of hundreds of billions in new monthly liquidity injections. Which is why moments ago he “capitulated” on his correction call.

From JPM:

We capitulate on our “correction” call. A stronger bull market (than anticipated) is underway in 2013, tracking more closely with a typical 5th year than we anticipated (average 5th year gain is 19%, implying 1700 by YE). What went wrong with our call over the past 6 weeks, in our view, is two-fold: first, economic data, while softening, did not weaken as anticipated and more importantly, markets looked through this (the March jobs report was the final example for us) and second, the market has worked off “contrarian sell” signals (HF beta, MF beta, AAII, etc.) without correction (digesting rather than correcting). >> Read More

Highlights from the pre-leaked minutes, which are along the lines of previous releases, in which there is a hint of an early QE tapering and halt by year end. Here is the key excerpt:

 

 

In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year.

Algos unsure if this means QE may be ending. The answer, of course, is no. But the Fed is doing everything to gauge market impact to increasingly more ominous and harsh language.

Pre: 10Y 1.779%, EUR 1.3070, ES 1565.5, Oil $93.69. Gold 1578

Some other highlights:

On Fed credibility: “Some participants were concerned that a substantial decline in remittances might lead to an adverse public reaction or potentially undermine Federal Reserve credibility or effectiveness.”

On inflation: “…a few participants noted that the risk remained that inflationary pressures could rise as the expansion continued, especially if monetary policy remained highly accommodative for too long.”

On QE: “…Asset purchases were seen by some as having a potential to contribute to imbalances in financial markets and asset prices, which could undermine financial stability over time.”

On QE Tapering: “Many participants, including some of those who were focused on the increasing risks, expressed the view that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings,” … “Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.”

Esther L. George. dissent: “the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher longterm inflation expectations… asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down.

Full minutes below

March Fomc

The Bank of Japan is taking the concept of quantitative easing to a whole new level. Unlike the Fed who is only focused on treasuries and agency MBS securities, the BOJ is authorized to purchase ETFs and REITs in addition to JGBs.

Reuters: – “The BOJ can buy whatever amount of ETFs and REITs it can. It can even buy government bonds more forcefully, as if it were to buy the entire amount in markets,” Hamada said in an interview with Reuters. 

“There are also other various measures, although the BOJ must also be mindful of the drawbacks.”

According to Credit Suisse, the BOJ’s balance sheet as a proportion of the nation’s GDP will far outstrip that of the other major central banks (excluding the SNB) within the next two years. This is uncharted territory – nothing of this magnitude has been tried before in a developed economy.  As a result, dollar/yen is at 99 (the yen is down some 25% over the past 6 months) and Japan’s stock market just hit a 5-year high. >> Read More