The market is getting the Fed all wrong: Nomura
Stocks and bonds dipped after Wednesday's Federal Reserve statement, as investors seemed to think a December taper now looks more likely. But George Goncalves, the head of U.S. rates strategy at Nomura, says the market is overreacting, and that the Federal Reserve will continue its $85 billion asset-purchasing program at least into 2014.
"The knee-jerk reaction that we saw yesterday in the equity market and the bond market, and the follow-through today with what's going on with the dollar and currency markets in general" is "really more of a buying opportunity," Goncalves said on Thursday's "Futures Now." The Fed "has to keep [tapering] on the table, but that doesn't mean that they're actually going to pull the trigger come December."
(Read more: Did the Fed just say December?)
Still, Goncalves admits that he, too, was a bit surprised by the Federal Open Market Committee statement. "We were expecting more of a dovish spin," Goncalves wrote in a post-statement note.
Goncalves points to the following description of the economy found in the statement: "Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economy activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy."
Now, besides one addition and one subtraction of time-related phrases, this exact sentence appears in the September statement. But Goncalves notes that traders were hoping to hear more about "fiscal drag" due to the government shutdown and debt ceiling threat.
(Read more: Full text of Fed statement)
Since such a note would have effectively removed the threat of December tapering completely, the fact that the Federal Reserve is still positive on the economy "means the December taper odds have moved up marginally," he writes, "but we think it's unlikely given the context of the statement."
After all, Goncalves said that with Chairman Ben Bernanke leaving and Janet Yellen presumably coming in, "It would really make no sense. His legacy's already been spoken for. She'll have some time to think about when to taper."
So while predicting that once the Fed does taper, "rates will start to rise aggressively," Goncalves added that "the Fed will not taper this early in the cycle."
As a consequence, Treasury yields are going nowhere fast between Halloween and the start of 2014, in his view. "We think it's really just a dead trade into the end of the year," Goncalves said.