Veteran WSJ Capital reporter David Wessels covered the impending US government nightmare on fiscal policies. As it stands right now, on Dec 31 2012:
1) The payroll tax goes back up
2) Income taxes return to pre-Bush levels. Hitting nearly all Americans.
3)Across the board automatic budget cuts centered heavily on Defense.
4) Debt ceiling issues and solvency issues re-emerge.
When put in the perspective of monetary policy, the FOMCs desire to extend language beyond 2013 is far from radical or excessive. In fact, it is a cheap insurance policy for the ineptitude of government. The election backs up any possibility of adult behavior until next year. We can always go with the Mayans.
When the Bush tax cuts were first put in place, the hinterlands of Eurodollar strips carried a slight premium (lower implied yield) embedding a consequence to the adjustment. Now, as time has passed and promises have been made, something completely different is priced. June 2013 is 99.39 (61) and March 2014 is 99.12 (88). Let's accept the levels as the accurate destination...what's the path to get there? Clearly, the Fed is concerned and the political process increases their fears.
We are pushing farther away from our "things will sorta work out" call from last Fall. Hooper is guiding trading while we decrease macro explanations of market gyrations.