Will the Fed Taper on September 22nd?

Federal Reserve Chairman Jerome Powell

Stocks traded flat this morning as tech recovered slightly from yesterday’s big losses. Equities ticked higher (albeit barely) after the latest batch of weekly jobless claims data rolled in. Initial claims clocked in at 310,000 last week, officially bringing the number of Americans on jobless benefits below 12 million.

This may have shifted sentiment in a more positive direction. Most unemployment benefits expired on Monday, which should improve the US labor situation moving forward.

Whether or not that impacts the Fed’s taper timeline, however, remains to be seen. Last Friday’s dismal August jobs report had analysts questioning when Fed Chairman Jerome Powell would issue an official taper warning. Prior to the jobs report, Wall Street assumed there would be a warning declaration on September 22nd following the next FOMC meeting.

But in light of the August jobs “miss,” some strategists believe Powell could instead announce a taper delay.

“A surprisingly low jobs number this morning clouds the tapering outlook considerably as only 235k jobs were added in August, likely giving the Fed pause and pushing out their plans to announce their bond taper plans,” explained Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note last Friday.

“Many people believed that the Fed would announce their taper plans at this month’s FOMC meeting and that is no longer likely.”

If weekly jobless claims continue to sink, though, Powell might go on ahead with his taper warning anyway.

Regardless, the European Central Bank (ECB) beat the Fed to the punch this morning when it announced its own plans to reduce asset purchases.

“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases under the (PEPP) than in the previous two quarters,” said the ECB in a statement.

European stocks, rather than sinking, pared-back their initial losses following the ECB’s press release. A taper warning from the Fed would undoubtedly have the opposite effect on US stocks when it arrives.

Much of the blow to European equities was softened by ECB President Christine Lagarde, who insisted that she “[wasn’t] tapering.”

“We are recalibrating, just as we did back in December and back in March. We are doing that on the basis of the framework, which is a joint assessment,” Lagarde said.

“We looked at the financing conditions and we concluded that they remain favorable, and we do that on the basis of the inflation outlook.”

The ECB said it would raise rates if inflation hit 2% “well ahead of the end of its projection horizon and durably for the rest of the projection horizon.”

In other words, it won’t happen unless a sudden inflationary blast rocks the EU. That doesn’t change the fact that Lagarde did in fact issue a taper warning, even if she claimed it wasn’t one.

If Powell can deliver a taper warning with similar finesse, US stocks might not instantaneously crash. However, should he provide investors with a specific date on which the Fed plans to reduce its bond-buying programs, a major slump seems likely to follow.

Powell could also follow Lagarde’s lead and simply say “we’re not tapering” right after he says the Fed’s going to taper. It worked on European bulls. American traders would probably eat it up, too.

But this level of uncertainty could contribute to an explosive monthly options expiration (OpEx) date, coming up on September 17th. The last few OpEx dates have seen rapid dips followed by even quicker recoveries to new highs. A correction this time around might last a little longer, though, with the FOMC meeting concluding five days later on the 22nd.

Nonetheless, the strategy of selling pre-OpEx and buying back in post-OpEx could still provide trades that outperform the major indexes, just like it has for most of the year.

Even with Powell hovering closely over the bull market, ready to unravel it at a moment’s notice after the FOMC meeting wraps up.


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