Parsing the Fed Minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1661.9	13.1	0.79%
Eurostoxx Index	2952.0	47.3	1.63%
Oil (WTI)	101.6	0.0	-0.02%
LIBOR	0.243	-0.003	-1.02%
US Dollar Index (DXY)	80.39	0.014	0.02%
10 Year Govt Bond Yield	2.70%	0.04%
Current Coupon Ginnie Mae TBA	105.2	-0.2
Current Coupon Fannie Mae TBA	104.3	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are higher on talk of a short term bump in the debt ceiling. Bonds and MBS are selling off.

Initial Jobless Claims increased to 374k. The jump was attributed to the unwinding of a computer problem in California and furloughed government employees.

The debt ceiling machinations are beginning to have more effects - in Hong Kong, the exchange increased the haircut on T-bills citing default concerns. Jack Lew is in front of the Senate Banking Committee this morning warning about the risks of not raising the debt ceiling. FWIW, Bill Gross is a buyer.

There was nothing earth-shattering in the FOMC minutes, which were released yesterday. On housing, they mentioned that the sector continued to strengthen, but they were worried about the increase in rates and what effect it would have. They noted the recent weakness in housing starts. The debt ceiling / government shutdown was mentioned as a further risk to the economy. Their estimates for GDP growth were taken down by 30 basis points.

On Page 8, they discuss the thought process behind the decision not to taper at the September meeting. For the most part, they were disappointed at the economic data and the ones who supported no changes to QE felt that reducing asset purchases would harm the housing recovery and the economy in general. The ones who were supported a reduction in QE were in favor of reducing it because they worried about sending mixed messages to the market, not because they were satisfied with the economy or were worried about inflation or asset bubbles. Because they sent the signal in June that they planned to reduce purchases and the market internalized it, they felt like they had to follow through, or else risk credibility at the Fed. They were worried about creating uncertainty. So here is the takeway, at least for me. They don't want to end QE, they don't even want to reduce it, but you may see a small tweak at the December meeting, just to prove that the Fed's communications about its intentions can be relied upon. And if the economy continues to stagnate, that may be it for a while. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

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