Tags: Nomura | Markets | Misreading | Fed

Nomura Strategist: Markets Misread the Fed

By    |   Sunday, 03 Nov 2013 01:31 PM

Judging from the reaction of stock and bond markets, financial players think the Federal Reserve will start winding down its stimulus in December.

But George Goncalves, the head of U.S. rates strategy at Nomura, says the markets are getting it wrong.

"The Fed has to keep it (tapering) on the table, but that doesn't mean they're actually going to pull the trigger come December," Goncalves told CNBC, predicting the Fed will continue its
quantitative easing stimulus, entailing purchasing $85 billion of mortgage and Treasury bonds a month, at least into 2014.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

October volatility in stocks and bonds in response to the Fed's announcement was a "knee-jerk reaction" that presented a buying opportunity to savvy investors, he says.

In addition, the central bank is unlikely to act at a time when Fed Chairman Ben Bernanke is about to step down and Janet Yellen (provided she's confirmed by the Senate) is about to replace him.

"For him to do it at his last meeting would really make no sense," Goncalves said. "His legacy's already been spoken for. She'll have some time to think about when to taper."

Instead of starting tapering in her first month as Fed chairman, Yellen will take time to analyze the situation, he predicts. "At that point, people will really believe that she means business."

However, he predicts rates will begin rising quickly once the Fed does start to taper, CNBC reports.

Because the Fed didn't mention the government shutdown and debt ceiling crisis as creating a fiscal drag, chances of tapering in December increased slightly but still remain small, he wrote in a note, according to CNBC.

It its statement the Federal Open Market Committee said it is waiting for more evidence that the recovery is sustainable before slowing its bond purchases. It noted that although the labor market is improving the housing sector slowed and federal budget cuts are restraining growth.

Although some economists say the Fed may start tapering in December, more predict it won't act until 2014, possibly in March.

"We continue to anticipate a flow of information that will not meet the bar until the March FOMC meeting," said Julia Coronado, chief U.S. economist at BNP Paribas, wrote in a note to clients, according to MarketWatch.

"For example, we think the October employment report will register a disappointing 100,000 gain in nonfarm payrolls, leaving the Fed firmly in wait-and-see mode."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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Judging from the reaction of stock and bond markets, financial players think the Federal Reserve will start winding down its stimulus in December. But George Goncalves, the head of U.S. rates strategy at Nomura, says the markets are getting it wrong.
Nomura,Markets,Misreading,Fed
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2013-31-03
Sunday, 03 Nov 2013 01:31 PM
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