BNY Mellon Capital Markets – Weekly Market Commentary

We have very little incremental information or opinions to offer to the tapering debate, even though numerous Fed speakers have attempted to change the market’s view over the past week. In addition to Yellen’s commentary last week and a follow up memo from her this week, we have heard from Bernanke, Rosengren, Dudley, Plosser, Kocherlakota, Evans, Raskin and Bullard (oh my!). The new Fed speak seems to be focusing on optimal control, which, from a literal definition, is almost comical, although we digress. The messages have been fairly consistent from most of the speakers, with a lax view on tapering and a possibly low for much longer message. The optimal control would introduce a lower unemployment rate thresholds, along with inflation targets, with flexibility in using both of these data points as possible triggers to raise rates. For the moment, we are not there, and tapering remains the market’s primary focus as it continues to imply that tapering is the first step towards a tightening, despite being admonished by the Fed for this view. For our part, we continue to favor higher rates, with economic surprises, positive corporates earnings, and our deep seeded belief that the Fed is concerned with efficacy issues driving our view. We do have a litany of data releases in the next week, including FOMC minutes later today, although we find it hard to envision the market extending from its March 2014 tapering view. We have prematurely posted November returns data, which shows mostly flat to slightly negative MTD returns, and a continuation of mostly negative YTD results. Credit has performed well from an absolute and/or relative perspective during prior bond bear markets, which is worth considering given the continued supportive credit environment.