Market Looking To Remain Tentative – Economic Highlights

Taper has effectively become a non-event, with the Fed expected to stay on course and announce another $10 billion cut to the pace of its bond purchases today. With benchmark treasury yields lower now compared to the start of the year or where they went immediately after the start of Taper talk a year ago, the smooth QE unwind has to be termed a success. The performance is particularly impressive given the passing of leadership baton from Bernanke to Yellen while the QE Taper was getting underway.

But many suspect that the lower yields are less a function of Fed effectiveness and more a result of the bond market’s skepticism of the consensus growth outlook. The FOMC members and the stock market believe that the U.S. economy was pulled down by temporary forces in the first quarter and remains on track for a sustainable above-trend growth in the current and the coming quarters. To that end, it will be instructive to see the FOMC members’ GDP growth projections this afternoon. With Q1 GDP growth expected to get revised down even further, FOMC members will likely lower their projections for this year from the March level of +2.8% to +3%.

The key issue for the market with respect to Fed policy is to handicap when they will start raising short-term interest rates from the current level. The consensus view anchored by FOMC projections is for a mid-2015 timeframe. But the Fed’s hand could be forced by developments on the inflation front, as Tuesday’s hot-looking May CPI showed. It will be interesting to see how Janet Yellen characterizes the inflation question in her comments this afternoon, but a higher path for inflation along the lines of what we saw yesterday will have a direct bearing on market expectations.

In corporate news, we got strong earnings reports from FedEx (FDX) and Adobe Systems (ADBE), while ConAgra (CAG) came out with a negative pre-announcement. Amazon (AMZN) will be in the spotlight today as the online retailer is widely expected to join the crowded smartphone space with a device of its own.