Bernanke: "It Would Be Appropriate to Moderate the Monthly Pace of Purchases Later This Year"; S&P and Shanghai Composite Updates

The FOMC didn't decide to slow down its Treasury bond and agency MBS purchases (QE) at its meeting last week, but Fed Chairman Ben Bernanke did warn at his press conference that the Fed might "moderate the monthly pace of purchases later this year." As a result, the stock market sold off, which, if you think about it, was already predicted on CNBC a month ago, in the Fed's minutes release on May 22, and in all of Jon Hilsenrath's WSJ articles. Also, since deflationary forces are still in the economy, it was expected that the Fed wouldn't taper off QE at this meeting. According to Bloomberg, "Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to increase monthly asset purchases above the current $85 billion pace if inflation slows further below its 2 percent goal." So you can see that the market really has no clue what it is pricing in on a daily, weekly or even a monthly basis. You could also say that China's interbank lending freeze and the IMF's warning about Greek aid was also part of the downside catalyst.

Here's what Bernanke said about the current pace of asset purchases (QE) and the federal funds rate at his press conference (full transcript here with Q&A):

If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.

I would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook, as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed; indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

"In the projections submitted for this meeting, 14 of 19 FOMC participants indicated that they expect the first increase in the target for the federal funds rate to occur in 2015, and one expected the first increase to incur in 2016. Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well-anchored, increases in the target for the federal funds rate, once they begin, are likely to be gradual, consistent with the Committee's balanced approach to meeting its employment and price stability objectives.

The purpose of this forward guidance about policy is to assure households and businesses that monetary policy will continue to support the recovery even as the pace of economic growth and job creation picks up. Importantly, as our statement notes, the Committee expects a considerable interval of time to pass between when the Committee will cease adding accommodation through asset purchases and the time when the Committee will begin to reduce accommodation by moving the federal funds rate target toward more normal levels."

Regarding the IMF and Greece, according to the Financial Times:

"The International Monetary Fund is preparing to suspend aid payments to Greece by the end of next month unless eurozone leaders plug a €3bn-€4bn shortfall that has opened up in Greece’s €172bn rescue programme, according to officials involved in managing the bailout.

The gap emerged after eurozone central banks refused to roll over Greek bonds they hold, and comes amid signs that even the scaled-back privatisation plan Athens agreed to last year is falling behind schedule."

China's interbank lending rates spiked last week as well (see the SHIBOR and repo rate moves). According to the LA Times today, the "Shanghai Composite Index fell 5.3% Monday, notching its largest single day drop since August 2009 and hitting its lowest level since December." The Shanghai Composite closed at 1,963. Here is the 5-year chart via Yahoo Finance. The overall trend still doesn't look that great, but who really knows what the government/PBoC plans to do with its banking system and asset prices.

Source: Yahoo Finance

Tom DeMark, creator of the DeMark Indicators, believes that the Shanghai Composite will rally here based on his exhaustion indicators. In December 2012, when the Shanghai Composite broke through 1,960, DeMark predicted that the Chinese market would rally to 2,900 in nine months. He was right for a few months, but $SSEC ended up retracing its entire move. So he has a few months left for the Chinese government and PBOC to juice the market 1,000 points from here!

After Bernanke said "the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year," the S&P plunged through its 50 day moving average and near-term uptrend line. Now robot trading algorithms might battle it out at the next two (major) uptrend lines and the 200 day moving average (see below). Walter Zimmermann, Senior Technical Analyst at United-ICAP, believes that $1,555 is a very important level to hold. I showed you levels to watch as well in that post. Here's an updated chart.

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