[B]Another taper obstacle falls as US budget deal is agreed[/B]
Today’s UK opening call provides an update on:
• Quiet day expected, with no major economic releases or Fed speeches scheduled;
• ECBs Nowotny and Constancio due to speak this morning;
• House and Senate negotiators agree two-year budget in a bid to avoid another humiliating shutdown;
• Will the deal, if passed on Congress, impact the Fed’s decision on tapering next week?
European indices are expected to open slightly lower on Wednesday, ahead of what is expected to be another very quiet day in the financial markets.
The economic calendar is looking very thin on Wednesday, with no high impact data scheduled to be released during either the European or US trading sessions. Some low level data is due out of Europe this morning but this is unlikely to have any impact on the financial markets, while the only noteworthy release this afternoon is the EIA crude oil stocks change, which is expected to show a drop in stocks of around 2.2 million barrels.
There’s going to be a lot of focus on the Federal Reserve this week, ahead of next week’s decision on its QE3 program. However, with Fed members now under an embargo, we’re unlikely to get any official comments that could potentially create any major swings in the markets.
We are due to hear from a couple of ECB members this morning, with Ewald Nowotny speaking in Austria and Vitor Constancio speaking in Frankfurt. Very little is expected from either of these speeches though, in relation to ECB policies, as the central bank only cut interest rates last month and are therefore unlikely to do so again for a few more months. There has been talk about potential negative deposit rates going forward but officials have so far been unwilling to discuss this in any real detail.
House and Senate negotiators have come to an early agreement on spending for the next two years, in a bid to avoid a repeat of the politically damaging government shutdown in October that lasted almost three weeks. The shutdown was hugely unpopular in the US as it forced almost 800,000 people out of work, without pay, and threatened to derail the fragile economic recovery that was only just starting to gain momentum.
As it turned out, the data for October and November has suggested that the shutdown had no impact whatsoever on the economy. Businesses continued to hire at a faster pace than in the months before, while consumers continued to spend despite surveys suggesting otherwise. Fortunately, government hasn’t viewed this as evidence that they can run riot again in January and have instead come to a agreement before the holidays, which should bring some comfort to the markets.
That said, the budget still needs to be passed in both the Senate and the House and does not involve raising the debt ceiling, which will be hit again in February, unless another agreement is made that involves raising it, making significant reductions in spending, or a combination of the two.
So what does this mean for financial markets? Well, the immediate impact at least appears to be minimal, for two reasons. Firstly, the budget still needs to pass through Congress, which as we’ve seen in the past is certainly no guarantee. Secondly, with the data showing the government shutdown had no impact on the data, investors weren’t as bothered by the potential for a repeat in January, from a markets perspective. If it had no impact previously, the same will probably be true again.
The only question now is, will this deal have any impact on the Fed’s decision to taper when it meets next week? While the data suggests it shouldn’t, I imagine it must be something the Fed officials will consider when making their decision next week. With another obstacle almost out of the way, this surely gives the Fed even more reason to opt for a small taper and see if the economy can begin to stand on its own two feet again.
Ahead of the open we expect to see the FTSE down 18 points, the CAC down 3 points and the DAX down 11 points.
[B]Budget deal provides temporary lift to investors[/B]
Today’s US opening call provides an update on:
[ul]
[li]Budget deal buoys European markets;
[/li][li]Budget still needs to pass through Congress;
[/li][li]Deal gives Fed one more reason to taper next week.
[/li][/ul]
European indices are trading higher on Wednesday, buoyed by a deal on the US budget that should avert another government shutdown in January.
The deal, struck between negotiators from the House and the Senate, doesn’t appear to particularly favour either side and is going to draw criticism from members of both parties. However, it is an important first step in ensuring that we don’t go through another shutdown, similar to October, that saw the popularity of both major parties drop significantly and almost 800,000 workers sent home without pay.
The budget still needs to pass through Congress, which may hit a few speed bumps along the way, but it’s a nice change to see US politicians being proactive in a bid to avoid the mistakes of the past rather than leaving everything until the last minute in a bid to gain political points. That said, the deal does not include a deal on the debt ceiling so we still have that to come in February.
One thing the deal does do is remove one more element of uncertainty that could have otherwise weighed on the recovery. There was no evidence in the October and November data that the previous shutdown had any negative impact on the economy, but that doesn’t mean it won’t in the future. We also don’t know if the economy would have performed even better in the absence of an unnecessary shutdown.
This can only play into the hawks hands come the FOMC meeting next week. It is becoming increasingly difficult for dovish Fed members to argue against a small tapering of asset purchases this month. The data has improved significantly, there’s no evidence of any negative impact from the shutdown and future obstacles to a sustainable recovery are now being removed.
Aside from the budget deal, there’s been very little else moving the financial markets on Wednesday. The economic calendar is looking very thin, with no high impact data scheduled for release. With Fed members now under an embargo before next week’s meeting, we should get no further clues on what decision the Fed will make next week.
Ahead of the open we expect to see the S&P flat, Dow down 4 points and the NASDAQ down 2 points.
00:09 - Markets mixed amid quiet day
00:33 - Deal in congress could raise taper prospects
02:54 - RBNZ rate decision ahead
[B]European futures lower as taper fears grow[/B]
Today’s UK opening call provides an update on:
• Sell-off in US and Asian equities overnight driven by tapering fears;
• Economic data releases pick up a little today;
• Mario Draghi scheduled to speak in Strasbourg;
• Mixed data for Australia sends the aussie tumbling.
European indices are expected to open lower on Thursday, following a similarly poor performance in the US and Asia over night.
The sell-off over night, and again in European futures this morning, continues to be driven by fears that the Fed will reduce its asset purchase program at its December meeting next week. The budget deal on Tuesday, although not yet passed through Congress, was the latest contributor to the sell-off as it removed another hurdle for the US, that could have otherwise led to another government shutdown in January, and gives the Fed less reason again to delay the taper next week.
Between now and the meeting next week, the moves in the markets are going to continue to be largely driven by investors interpretation of what the Fed will do next week. This isn’t ideal, but it’s not helped by the lack of economic data being released this week, the lack of earnings reports or even the lack of comments coming from the Fed, with officials now being under a week long embargo ahead of the meeting.
Things are actually a little better today, in terms of economic releases. This week has been very quiet so far on the data front, as is always the case in the week following the non-farm payrolls. Today though is a little better, with industrial production figures for the eurozone scheduled for release this morning, while this afternoon, we’ll get the retail sales figure, for November, from the US. This is the final piece of the jigsaw ahead of the Fed meeting and could make the difference when it comes to the decision on tapering. Also being released will be the weekly jobless claims figure which fell below 300,000 last week and is expected to rise slightly this week to 320,000.
Also this morning, we’ll hear from ECB President Mario Draghi, who is scheduled to speak in Strasbourg. Not too much is expected from this speech by Draghi, or any questions that may follow. People use these speeches to try and get insight on current and future ECB policy. However, with the central bank having cut rates to record lows last month, I can’t imagine there’s too much for Draghi to give away on this occasion.
The ECB is believed to have considered the use of negative deposit rates as a means of monetary stimulus in recent months, but this is not likely to be a knee-jerk reaction from the ECB, or a topic that Draghi will be keen to discuss.
The ECB monthly report will also be released this morning, but this again is likely to be largely ignored. The report is only likely to echo what Draghi said in the press conference following the meeting last week, and will therefore not contain any clues on the potential for further rate cuts in the coming months, whether that be to the main refi rate or the deposit rate
Overnight we had some mixed data released from Australia, where the number of those employed rose by 21,000, more than double the expected figure, while the previous figure was revised lower. At the same time, the unemployment rate rose to 5.8%, in line with expectations, but once again heading in the wrong direction. The initial reaction to the negative was negative, with the Australian dollar falling against the greenback, but we’re already seeing it recover a little. After the last couple of releases, the reaction to the data has been similarly negative, but the currency has gone on to recover most, if not all, of its losses during the European session. It will be interesting to see whether we get a similar reaction today.
Ahead of the open we expect to see the FTSE down 35 points, the CAC down 11 points and the DAX down 38 points.
00:11 - European indices lower on Fed taper fears
00:23 - Eurozone industrial production figure falls below expectations
01:29 - Retail sales and jobless data the final piece of the puzzle
[B]Taper expectations rise as US budget gets House vote[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Europe higher ahead of quiet end to the week;
[/li][li]Taper expectations rise on strong US retail sales;
[/li][li]Two-year US budget awaiting Senate vote;
[/li][li]Five BoE and ECB officials scheduled to speak today.
[/li][/ul]
European indices are expected to open slightly higher on Friday, ahead of what is expected to be a very quiet end to the week in the financial markets.
The entire week has been pretty quiet really, which isn’t necessarily unusual in the second week of the month, when far fewer pieces of high impact economic data are generally released. This also hasn’t been helped this week by the FOMC meeting next week which has meant all Fed members are under an embargo and are therefore not allowed to release any official statements.
Given how important these statements have been to the financial markets recently, with the Fed’s asset purchase program being the main driver in the markets at the moment, the markets have somewhat lacked direction. The lack of risk appetite ahead of the FOMC meeting next week has actually weighed on equities a little this week, with small losses being seen as investors position themselves ahead of a possible taper.
Fears of a Fed taper have only increased this week, with the retail sales figure potentially being the final nail in the coffin, coming in above expectations at 0.7%, while the previous figure was revised higher. Also not helping this was the deal reached earlier this week between negotiators from the Democrats and the Republicans, which passed comfortably through the House last night.
Assuming the Senate passes the two-year budget as well, which I expect they will as it doesn’t appear to favour either side particularly, this will remove another hurdle for the US economy next year, allowing the recovery to gather some momentum without the US government repeatedly shooting itself in the foot. That said, we still have the debt ceiling debate to come in February so there’s still plenty of time for that.
There’s very little to focus on in Europe on Friday, with no major pieces of data being released and no noteworthy companies reporting earnings. We will hear from a number of central bankers from the Bank of England and the European Central Bank, although their comments are unlikely to have much, if any, impact on the markets, given that neither are expected to loosen or tighten monetary policy in the coming months.
This is especially true of the BoE, who has been very transparent recently, laying out a very clear plan for the next 18 months or so. The ECB has been less clear, however we did get a rate cut only last month, which was followed by a small rebound in inflation, followed the unexpected drop to 0.7%.
Ahead of the open we expect to see the FTSE up 4 points, the CAC up 2 points and the DAX up 11 points.
[B]US futures point to indices ending the week on a high[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures pointing to a higher open on Friday;
[/li][li]Budget deal removes another hurdle for the Fed;
[/li][li]Strong US data supports taper;
[/li][li]Quiet day expected with no data or Fed comments.
[/li][/ul]
US indices look likely to end the week on a positive note, following a few negative sessions as investors finally face up to the reality that quantitative easing may start being phased out next week.
Everything we see and hear at the moment seems to support a reduction in asset purchases next week, from jobs figures to consumer behaviour and even fiscal issues. The latter has been the most recent development, with negotiators from the Democrats and Republicans striking a deal on a two-year budget that will avoid a repeat of the October government shutdown in January.
This was previously seen as a potential obstacle for the economic recovery that the Fed may want to move past before withdrawing its support, despite evidence suggesting that the shutdown in October had no negative impact. With the budget being passed easily in the House yesterday, I expect the vote in the Senate to run just as smoothly, which may give the Fed confidence that the economy can take a small taper.
The next hurdle will be the debt ceiling, which the US is due to hit in February. However, I don’t think this is seen by many as a serious threat. This is not because it wouldn’t have a devastating impact on the economy and the financial markets, because it would, it’s because the government has shown in the past that they will absolutely not allow it to be hit. Even if a deal is struck at the last minute, it will definitely be struck.
The data we’ve seen for October and November has been surprisingly strong under the circumstances, which again suggests the economy can take a taper next week. Yesterday’s figures could potentially have been the final nail in the coffin for QE3 in its current form.
We still have a few more pieces of data being released early next week, before the FOMC announces its decision on Wednesday. These figures will of course play into the Fed’s decision, but the most important figures have already been released and they have all been very good.
It could be argued that another month of data is necessary for the recovery to be viewed as sustainable, but the FOMC may decide that its credibility is more important than one more month of data. Chairman Ben Bernanke claimed earlier this year that tapering would probably begin later this year and ending in the middle of next.
Since this time, the Fed’s communication and transparency have been heavily questioned and this would go some way to justifying their position. As previously promised, they waited for the data to improve and tapered at the end of the year.
Unfortunately today is not one of those days that has any economic releases that will impact the decision on next week. In fact, the economic calendar is looking very bare and with Fed members under a week long embargo ahead of the meeting, trading volumes may be relatively low.
Ahead of the open we expect to see the S&P up 4 points, Dow up 24 points and the NASDAQ up 9 points.
It’s been a quiet day so far in the financial markets but things should pick up significantly next week, with a number of high impact figures being released and, most important of all, the FOMC decision on Wednesday. Market Analyst takes a look at how events in the last 24 hours impact the FOMC meeting next week and what he expects the outcome to be.
[B]Investors risk averse ahead of Wednesday’s Fed decision[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Investors risk averse ahead of Wednesday’s FOMC decision;
[/li][li]Chinese and Japanese data fails to inspire;
[/li][li]Eurozone PMIs in focus this morning.
[/li][/ul]
Risk aversion ahead of Wednesday’s FOMC announcement and weak data from Asia is weighing on European futures ahead of the open on Monday.
This week’s Fed meeting is likely to seriously weigh on risk appetite in the early stages of the week, as investors become increasingly concerned about a reduction in asset purchases, that could bring to an abrupt end the daily record highs being recorded in US indices. The data over the last couple of months has certainly justified a small taper, it’s just a case now of whether Chairman Ben Bernanke will want to risk rocking the boat at his final meeting in charge or wait to see another month of positive economic readings and leave the decision to his successor Janet Yellen.
We’ve had a mixed response to the data out of Asia over night, which has contributed to the losses being seen at the start of the week. The figures themselves don’t actually look that bad, in fact the Japanese Tankan survey figures look very encouraging. The large manufacturing outlook and the non-manufacturing outlook fell short of expectations, but even these, along with the other readings, showed significant improvement again in the fourth quarter. The headline large manufacturing index rose to 16 in the first quarter, the highest level in six years, after being in negative territory only earlier this year.
Even the Chinese HSBC manufacturing PMI isn’t as bad as is being made out. The index is still comfortably in growth territory, at 50.5, and has only fallen slightly from the reading in November. I think what we’re seeing here is a typical case of risk aversion from investors ahead of Wednesday’s Fed decision, with any negativity in the data being viewed as a reason to sell. Ordinarily, the figures themselves wouldn’t be viewed in such a negative way.
It will be interesting to see what kind of response we get to the data being released today, with a large number of manufacturing surveys being released this morning. This is the first reading of these PMIs so could give an early indication about any slowing of the recovery, which has barely taken off as it is.
Already we’ve seen signs that the French economy is struggling to gather any momentum. In fact, France, along with Spain could fall back into recession this quarter, having recorded small negative growth figures in the third quarter. Small improvements are expected from most of the manufacturing and services PMIs for France, Germany and the eurozone. The only figure that isn’t expected to improve is the German services PMI, which is expected to fall slightly to 55.5, still comfortably in growth territory.
This is going to be a data heavy week for the markets, after seeing the complete opposite last week. Unlike last week, there will be plenty of things driving financial markets, although with all eyes on the FOMC meeting on Wednesday, the only question is how much attention will investors give all these economic releases. It wouldn’t be unusual for investors to pretty much ignore the data and instead focus solely on the Fed decision.
Ahead of the open we expect to see the FTSE down 26 points, the CAC down 13 points and the DAX down 22 points.
[B]Stocks turn higher after negative start to the day[/B]
Today’s US opening call provides an update on:
[ul]
[li]Indices higher after negative start to the day;
[/li][li]Eurozone PMI gains driven by German exports;
[/li][li]US manufacturing figures key today;
[/li][li]FOMC decision likely to weigh on risk appetite.
[/li][/ul]
European indices have turned higher this morning following a difficult start to the session.
There had been a lot of risk aversion in the markets early in the European session, but that seems to have changed following the release of the eurozone PMIs. On the face of it, the manufacturing and services PMIs weren’t actually that great.
Both French figures were actually significantly below expectations and deep into contraction territory. However, investors appear to have reacted very positively to the jump in the eurozone composite and manufacturing PMIs which beat expectations and rose significantly from November. The improvement was largely driven by the jump in German export-focused manufacturers, which investors clearly see as a positive thing.
Investors did not view the Chinese or Japanese data with the same positivity, despite these arguably being the stronger releases. The headline Japanese Tankan manufacturing index rose to 16, the highest in six years. This has clearly been helped significantly by the weaker yen, following a huge monetary stimulus program that has been undertaken by the Bank of Japan this year.
The Chinese HSBC manufacturing PMI also wasn’t as bad as the reaction in the markets overnight would suggest. The figure did fall slightly to 50.5, which may suggest the recovery is losing momentum, but this is still comfortably in growth territory which is what counts.
We have more data being released this afternoon, with the US manufacturing PMI and the Empire State manufacturing index being of particular interest. Both are expected to have improved in December which may provide more of a boost ahead of the opening bell.
That said, investors are going to be distracted in the coming days ahead of the FOMC decision. We already saw risk aversion from investors earlier in the session and this is likely to increase over the next couple of days. The majority of the data recently, particularly the NFP, Q3 GDP and unemployment figures, has supported a small taper from the Fed and investors are going to be very concerned about this.
Ahead of the open we expect to see the S&P up 7 points, Dow up 68 points and the NASDAQ up 17 points.
00:23 - Markets higher as they buy the dip
00:58 - Chinese manufacturing PMI falls
01:25 - Eurozone PMIs shows mixed messages
[B]European data in focus as Fed kicks off December meeting[/B]
Today’s UK opening call provides an update on:
[ul]
[li]UK inflation nears BoE target four years after last hitting it;
[/li][li]Eurozone inflation expected unchanged from preliminary reading;
[/li][li]Economic sentiment to pick up again in the eurozone;
[/li][li]US inflation data to be released ahead of tomorrow’s Fed decision.
[/li][/ul]
It’s going to be another busy day in the financial markets on Tuesday, with plenty of data being released and investors keeping one eye on the FOMC meeting which starts today.
The UK gets things underway on Tuesday, with the release of a range of inflation data for November. The Bank of England’s preferred measure of inflation is the consumer price index, so this tends to be the one that investors focus on. This is expected to remain at 2.2%, very close to the BoEs 2% target which hasn’t been hit in exactly four years.
However, it is heading in the right direction which will provide some relief to investors, for a couple of reasons. Firstly, it provides further comfort to businesses and households that inflation won’t spike higher and invalidate the BoEs forward guidance on interest rates, forcing them to raise them. Also, from a consumer perspective, it closes gap between wage inflation and the cost of living, which has been rising at a much faster rate for a long time now leaving people worse off in real terms.
The other inflation readings being released are the retail price index, which is expected to show inflation creeping up to 2.7%, and the producer price index, which is expected to show prices for manufacturers falling by 0.5%. While investors don’t pay too much attention to this figure, it can be a good indication of future price inflation, with price changes at the manufacturing level eventually being passed on to consumers.
Following this we have the inflation reading for the eurozone, where the increasing fear of disinflation turning into deflation forced the ECB to cut interest rates in November to record lows of 0.25%. The preliminary reading for the CPI figure showed inflation rising to 0.9%, from 0.7% in October. This is expected to remain unchanged today which will help ease deflation concerns for now, although with countries in the eurozone continuing with their austerity efforts, the threat of deflation will not go away. That said, as ECB President Mario Draghi has stated previously, deflation in certain countries has been intentional in order to regain competitiveness so this is not a huge concern right now.
Next up we have the German and eurozone ZEW economic sentiment figures being released. Both of these are expected to improve for December, which is encouraging as it means investors and analysts are becoming more optimistic about the recovery in the eurozone. That said, a large part of this is driven by improvements in Germany, while the likes of France and Spain are once again on the brink of recession. This isn’t ideal but it could be far worse.
We have more inflation data being released in the US this afternoon, although this is not the Fed’s preferred measure of inflation so it can, to an extent, be taken with a pinch of salt. Low inflation is the only reason why some investors believe the Fed won’t taper tomorrow, with the rest of the data over the last couple of months clearly showing that the economy is improving.
People may look to today’s core CPI figure for signs that inflation is on the rise, which may suggest similar results will be seen in the preferred measure, the core personal consumption expenditure index, going forward. The only problem with this is that there hasn’t been much change for a long time in the PCE figure, so I don’t know what investors expect to change here in the next couple of months. If this was a real concern, the Fed should increase its asset purchases in an attempt to hit its 2% inflation target, not do nothing and hope for the best.
Ahead of the open we expect to see the FTSE down 3 points, the CAC down 3 points and the DAX up 7 points.
[B]Investors cautious ahead of tomorrow’s FOMC decision[/B]
Today’s US opening call provides an update on:
• Investors cautious ahead of tomorrow’s FOMC decision;
• European indices lower despite very encouraging economic surveys;
• US core CPI figure expected to remain unchanged.
US indices are expected to open marginally lower on Tuesday, as investors err on the side of caution ahead of the FOMC announcement tomorrow.
Yesterday’s rally led many to believe that tapering had either been fully priced in or that investors did not believe the Fed would act at this month’s meeting. The response seen in US futures and European indices during the morning session would suggest otherwise.
This suggests that yesterday was nothing more than investors buying the dips after the S&P ended the week with four consecutive negative days. And while the buying looked aggressive at the time, the S&P only pared around half of those losses before pulling back later in the session.
Today we’re seeing more risk aversion from investors, which isn’t overly surprising given that the FOMC will announce tomorrow whether it will scale back its asset purchases or not. Investors appear split on this at the moment, with some pointing to the significant improvement in the data and others warning about the low levels of inflation.
What this means for the markets is that there’s plenty of scope for significant moves whatever the FOMC decides to do. This uncertainty among investors is what’s likely to contribute to the caution among investors over the next couple of days.
We’ve already seen this caution this morning. The data out of the eurozone has been very good, with the ZEW economic sentiment figures both rising significantly and easily beating expectations. The German figure rose to 62 from 54.6, against expectations of a rise to 55, while the eurozone figure reached 68.3, its highest ever level, from 60.9 last month.
Despite these very encouraging figures, European indices are trading lower across the board at the moment, which again highlights the risk averse nature of investors this morning.
The US session could be a little quieter on Tuesday, with very little economic data being released and no comments expected from the Fed in relation to tomorrow’s decision. The only notable economic release is the CPI inflation figure for November, which is expected to rise to 1.3%. The core CPI figure, which is seen as a more reliable inflation measure, is expected to remain at 1.7%.
That said, neither of these are the Fed’s preferred measure of inflation, with the central bank instead favouring the core personal consumption expenditure index. With this in mind, investors tend to take the CPI reading with a pinch of salt, paying more attention to significant moves rather than specific levels. A significant rise in the figure today, for example, may suggest that the core PCE will rise going forward which could ease disinflation concerns among the Fed.
Ahead of the open we expect to see the S&P down 2 points, Dow down 6 points and the NASDAQ down 2 points.
00:09 - Markets retrace after yesterday’s rally
00:53 - UK CPI falls to 2.1%
01:38 - German ZEW investor confidence survey to 7yr high
02:04 - A look ahead to tomorrows FOMC announcement
[B]UK unemployment and BoE minutes in focus this morning[/B]
Today’s UK opening call provides an update on:
[ul]
[li]UK unemployment and BoE minutes in focus this morning;
[/li][li]Yesterday’s beat in German ZEW suggests IFO beat could be on the cards;
[/li][li]Investors to finally get tapering answers this evening.
[/li][/ul]
We have a busy day ahead of us in the financial markets on Wednesday, with UK unemployment data kicking things off this morning and the FOMC decision wrapping things up later on tonight.
The UK unemployment figure, along with a few other related data releases such as average earnings and jobless claims, will be released alongside the minutes from this month’s Bank of England MPC meeting. The meeting itself was an unsurprisingly dull affair, with no changes to interest rates or asset purchases being announced, as expected, and no statement or press conference following it. I’m sure at least one of these will change in 2014 now that Mark Carney has settled into his position as Governor.
With that in mind, I don’t expect the minutes themselves to tell us anything we don’t already know. The BoE has been very transparent in recent press conferences and testimony’s, leaving very little for financial markets to predict on their own, unlike its US counterpart. The Fed tried the open and transparent approach earlier this year but it only came back to bite them. Investors assumed, based on their comments that tapering would begin in September, which has a significant impact on the markets. When tapering never came, investors were left very frustrated with the Fed and since then the communication from them has been very unclear.
The BoE on the other hand has had no such problems. The only problem it’s had has been around forward guidance, with investors, correctly as it turned out, not buying into the assumption that unemployment would take three years to fall to 7%. Carney finally acknowledged recently that this forecast had been incorrect and now accepts that this threshold could be hit in 18 months. Although he has refused to amend the guidance.
This makes the unemployment rate a very important piece of economic data to follow. While Carney has made it perfectly clear in the past that the 7% threshold isn’t a trigger for a rate hike, without any further information, markets are likely to price in a hike in the six months following this threshold being met. And this could come even sooner than the BoE has now acknowledged, which means any reduction in the unemployment rate today could prompt a significant reaction in the markets.
Also this morning we have the German IFO business climate figure being released, which is expected to rise slightly to 109.5 from 109.3. Given yesterday’s surprisingly strong ZEW figure, which showed institutional investors and analysts being far more optimistic about the next six months than in November, I wouldn’t be surprised if the IFO figure reflected a similar boost in sentiment among businesses. We could therefore see a significant beat here, as we had yesterday.
The main event today comes from the US, with the FOMC completed its two-day meeting and announcing whether it will scale back its asset purchase program or leave it on hold for another month. More and more analysts appear to be moving into the Q1 2014 camp now, with surveys showing, at best, only a third of people predicting a reduction today.
This seems very odd considering the number of investors and analysts that predicted a taper in September, when the economic data wasn’t a good as it has been in recent months and with budget and debt ceiling negotiations to come in October. We still have debt ceiling talks to come in February, but with another government shutdown in January now pretty much off the table, there’s much fewer obstacles for the recovery than there were before.
Those who point to inflation as the reason for the Fed not tapering today due to stubbornly low inflation seem to forget that, according to the Fed’s preferred measure – the core personal consumption expenditure index – inflation has been between 1.1% and 1.3% for the whole of 2013. What’s going to change with this in the next couple of months that hasn’t already? And if this is a real concern, then surely an increase in asset purchases is the suitable response from the Fed, rather than more of the same.
Ahead of the open we expect to see the FTSE up 17 points, the CAC up 5 points and the DAX up 22 points.
[B]US futures higher ahead of FOMC decision[/B]
Today’s US opening call provides an update on:
• Indices higher ahead of FOMC decision;
• Data and budget resolution support taper;
• No guarantee that not tapering will help boost inflation;
• Tapering would help restore Fed credibility.
The prospect of Fed tapering is clearly not having a negative impact on investor sentiment on Wednesday, with European indices trading significantly higher across the board and US futures pointing to a similar open on Wall Street.
Expectations for the FOMC decision differ significantly depending on what survey you’re looking at, with some showing as few as 10% predicting a taper and others making it more like 40%. One thing the majority have in common is that all seem to suggest that the majority don’t expect a taper today, but as we saw in September, that Fed isn’t concerned with what the majority think.
I would put myself in the minority on this occasion and say I think there’s around a 60% chance of a taper. The data certainly support this and with one more obstacle removed, now that the two-year budget is all-but passed, I see no good reason why the FOMC would not taper. Especially when you consider the comments from the Fed over the last six months, particularly the ones that claim it is data dependent.
One argument has been that inflation is well below the Fed’s 2% target, at 1.1%, which is a valid argument. The only problem with this is that throughout this year, inflation has been between 1.1% and 1.3%. The $85 billion of asset purchases has done nothing to boost this. Why would this change in the next couple of months?
Ordinarily, a return to higher levels of growth would boost inflation but the whole argument for tapering this month is that this growth is sustainable, whether the $85 billion or $75 billion per month is pumped into the financial system. If that is believed to be the case then there is no reason to hold off on tapering.
The other reason to start now is for the Fed’s credibility. Chairman Ben Bernanke was very open this year about what the Fed plans to do, when he claimed that tapering would start later this year and the quantitative easing program would end, data permitting, in the middle of next year.
The markets assumed this meant September even though the data did not support this. This played havoc with the financial markets and forced Bernanke to keep his cards closer to his chest in recent months. Should the Fed decide to taper today, it would effectively mean that Bernanke has stuck by his words earlier this year and suggest that the pandemonium in the markets in recent months has been driven by speculation rather than the Fed’s poor handling of its exit plan. To an extent, credibility would be restored.
Ahead of the open we expect to see the S&P up 4 points, Dow up 41 points and the NASDAQ up 6 points.
It looks as though investors will never learn when it comes to the Federal Reserve. Once again, the majority in the markets got the big decision wrong, expecting the FOMC to leave asset purchases unchanged in December, despite the economic data clearly supporting a small taper and future hurdles being removed, namely another government shutdown in January, before the meeting got underway.
The response in the markets following the decision was exactly what would be expected, huge amounts of volatility followed shortly after by dollar strength, before eventually settling pretty much where they started. Now this would suggest that a $10 billion taper had been priced in, but surveys and trading in the lead up to the announcement show otherwise.
This battle, which we haven’t seen much of so far, is one between those who are optimistic on the economy and those who fear the impact on the markets of a reduction in monetary stimulus. In the coming days, I expect the latter group to take control but in the longer term common sense will prevail and markets will once again begin to reflect an improving economy. Not one addicted to huge injections from the Fed.
Alternatively, it may suggest that markets aren’t actually that fazed by small reductions in Fed support as long as it’s due to the economic picture improving. This bodes well going forward with the Fed clearly concerned about the impact on the markets when it tapers, or even raises interest rates, following the debacle in September.
[B]Markets rally as US begin tapering with $10 billion reduction[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Markets rally following yesterday’s announcement;
[/li][li]Tapering begins with $10 billion reduction
[/li][li]Forward guidance surprises markets as 6.5% threshold is loosened
[/li][li]FOMC members provide strong economic projections.
[/li][/ul]
European indices are expected to open higher this morning as global markets rallied following last nights announcement that the US would finally begin to trim back on it’s asset purchase programme. Despite this move seeming somewhat counter-intuitive given the like between stimulus and growth, it was clearly a mix of the taper being ‘priced in’ to some extent along with a more dovish taper than expected.
History was made yesterday evening, when Fed Governor Ben Bernanke announced the first cut to the QE3 asset purchase scheme, reducing the rate of monthly purchases by $10 billion. Market consensus regarding whether such a move seemed likely or not was notably polarised, where the largely dovish standpoint of most was called into question with the release of significantly better than expected data over the last two months. Bernanke decided to split that $10 billion equally between the MBS and treasuries components, explaining it ‘would be the simplest’.
What this measure does is provide a framework for the markets and wider economic participants to fully understand that the pathway towards weaning the US from the artificial drug of QE is being established. As such, whilst the focus will largely be fixed upon whether or not the rate of asset purchases will be reduced each month, the hope is that the growing familiarity with the occurrence will lessen the impact going forward.
Perhaps the most notable event following the news that tapering was set to begin was Ben Bernanke’s disclosure that going forward, the interest rates will remain near zero until ‘well past’ 6.5%. This comes despite his previous view that this would be the threshold to initiate rate hikes. Market chatter points to a possible 6.0% threshold being speculated, thus pushing low interest rates back into the distant future. Thus whilst the act of tapering represents a form of monetary tightening, the extension of minimal interest rate expectations is tantamount to monetary loosening of sorts. This has been cited as the main reason behind the reactive jump in the US indices which saw both the S&P500 and DJIA hit record highs following the announcement.
The conclusion of the two day Fed meeting also brought about a raft of economic projections from the FOMC members, painting a picture of the coming years from the standpoint of those in the know. Overall the projections portray a positive economy where growth is expected to pick up, unemployment move lower, faster, and crucially where inflation is expected to push closer towards the target level of 2% in 2015/16. The importance of the inflation rate should not be understated, as this is the primary mandate of the Fed, much like the BoE. Thus without expectations that this will pick up despite a reduction in asset purchases, no taper would have happened. Going forward, the importance of the Fed will hopefully diminish, with luck returning the markets to a scenario where positive economic data is seen as good news for the market rather than the inverse relationship borne out of the Fed’s decision-making process. That being said, the equity markets in particular are clearly at such lofty heights in part due to the creation of liquidity under Bernanke’s stewardship. This calls into question whether such levels would be warranted should we simply view the markets in a direct relationship with the strength of the economy and businesses.
In European markets, the impact of the US decision is likely to remain the chief topic as traders continue to decipher what this means for the future. However, there is some movement in the form of the retail sales figure out of the UK due in the morning. The market consensus points towards a move back into positive growth for the measure, with 0.7% expected following a figure of -0.3% in October.
The European indices are expected to open higher, with the FTSE100 +62, DAX +82 and the CAC +43 points.