Stock Market Strategy: Understanding Fed Speak & Economic Statistics
Posted By Bret Rosenthal, March 31st, 2011 : PermalinkGuest Post: M.S. Howells & Co. Jose Mazas – ‘The Art of Lying’
To be the top economist in the nation, you have to be a good manipulator. Greenspan let it slip once. He said, “‘I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant”.
One thing to keep a straight face on is exact knowledge of future economic prints as well as the potential political pressures that policy makers are under. In the age of Wikileaks these institutional biases should not be ignored. We would, therefore, like to debunk two widely held beliefs, in the spirit of Wikileaks, by showcasing the historical record.
The first myth is that policy makers are unaware of yet to be released economic data. While it seems reasonable that policy makers should have this data well ahead of their official release, we as market participants often choose to believe that no such thing occurs. It’s just too much of a conspiracy theory, but in this case there is clear evidence that it is a myth. Evidence: See page 149 of the FOMC transcript of the January 30-31 2001 FOMC meeting. It reads, “Indeed, the Chicago Purchasing Managers’ Survey results for January that will be released tomorrow show….”
Keep in mind that this is not a government sponsored survey, which should buttress our accusation that policy makers have perfect immediate foresight for important government operated surveys/samples. This is the prudent action to undertake- to peak at the numbers.
The second myth we’d like to debunk is the denial of the political cycle. Michael Johnson has undertaken a series of analyses on the impact of the political cycle on the media sector. Rational Economists have been debating the existence of the political cycle, mostly because it is difficult to measure. Yet oftentimes just because you can’t measure something precisely in the economic/financial data does not necessitate its denial, that is why econometricians formulate hypotheses to test and the that is why we never accept the Null Hypothesis, but rather say “we don’t have enough evidence to reject it”.
So, let’s try a different approach to assess whether the Fed could at times be influenced by the political environment rather than the economic environment, thus making it its independence less than concrete. Let’s go to the tapes, the Nixon Tapes! President Nixon taped all conversations held in the Oval Office, some of them got him into trouble, but those that remain have proven their worth to presidential historians and political scientists. A brilliant article in The Journal of Economic Perspectives (Fall 2006) illustrates the very interesting behind the scenes look at how President Nixon, in a bid to try to maximize his likelihood of being re-elected, pressured then Fed Chairman Arthur Burns into easing monetary policy in spite of Burns’ belief that easing was not necessarily in the best interests of the then US economy. At one point in their private conversation, Nixon turns to Burns and says “I know there’s the myth of the autonomous Fed…” and then laughs. Burns did in fact lower interest rates after a temporary soft patch.
Unlike the Fed that tries to keep a secret, we have, in this current administration, observed instances where the unemployment report was alluded to, before its release. This has not happened this week, however, we have detected a slight change in the tone of certain Fed speakers from last week into this week; we have heard the tone softening. Boston Fed President Rosenberg said on Monday “We don’t want to take away the accommodation too quickly”. The same day, Mr. Lockhart said “I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy”. Additionally Mr. Bullard turned less hawkish from the prior week and said on Tuesday, “…additional uncertainty has clouded exit outlook…”. He was referring to the recent geopolitical events, or was he referring to this week’s employment report?
Our own econometric models which incorporate forecast expectations and the biases therein suggest we are not going to get a blow out strong number on Friday. In fact, our models suggest that the pace of hiring, in terms of changes in Non-Farm Payrolls, is likely to slow from last month’s unrevised pace of 192k. We do see elevated chances of a print below 150k, but even at an elevated 43%, (vs baseline of 30%), it is still a wise bet to expect a fairly muted NFP that is slightly worse than last month’s reading. In terms of the Unemployment Rate, we see a likely reading of 8.9% or 9.0%, with lower readings being unlikelier from a statistical bias perspective.
In summary, do listen to the shifts in tone from Fed speakers and administration officials, because they may know something we don’t and which they may not want to tell you. If you believe you understand what you think I said, it may be that what you read is not what I meant.
Bret Rosenthal is a Principal of Rosenthal Capital Management
Tags: bullard, Fed, FOMC, greenspan, lockhart, M.S. Howells, NFP, Non-Farm Payrolls, rosenberg, unemployment
