Increased likelihood that the Federal Reserve may taper stimulus in September thanks to pro-tapering remarks by prominent Fed members on Tuesday [Lockhart and Evans] leaves the market feeling uncomfortable. Little macro data in the US and in Europe means there are no distractions for investors who are fixated with the Fed’s impending tapering activity. The selloff in risk assets started on Wall Street on Tuesday, fed through into Asia [one of the biggest winners of easy Fed cash through the years of stimulus measures by the US central bank] and weighed on prices in Europe this morning. The risk-off tone continues on Wall Street with the S&P500 below the 1700 mark while the USD gains on economic strength/tapering of QE. Traders are feeling restless. The Fed has two press conferences left this year; September and December and it’s likely tapering will be announced at either one of these conferences this year. Given that we continue to see growth out of the US economy [almost every facet] and that FOMC members are now even more united on tapering, traders are convinced we are likely to see the Fed start the process in September. These fears however appear to be overdone. The unemployment rate is at 7.4%, still way off the Fed’s target of 6.5% before tapering can really take place. Fed head Bernanke has been dovish on monetary policy and communication by Fed members involves a caveat as the emphasis is on solid economic growth indicating the US is on a path of self-sustaining recovery before tapering can take place. At this point, the US economic recovery looks nascent rather than in full-swing. Conditions in the labour market have to improve further before this recovery can be called self-sustaining. Staying on central banks, today’s main event was the BOE’s Inflation Report. Governor Mark Carney detailed the Bank’s latest forward guidance strategy, maintaining interest rates at low levels until 2016 in a bid to spur investing by the UK public. Importantly, the BOE has adopted a Fed style approach by placing the unemployment rate over inflation target as the deciding factor of adjusting monetary policy. The BOE placed a threshold of 7% on the unemployment rate before hiking rates/scaling back QE – currently, the unemployment rate is at 7.8%. The BOE forecasts that it will take up until late 2016 before the unemployment rate will move close to the 7% rate – that’s around some 800,000 jobs to be generated by the UK economy for the next 3 years which appears to be too ambitious. We could be in a near zero interest rate policy [ZIRP] environment for some time now. That being said, the market appears to be generally pleased by the BOE’s latest methodology as it provides greater clarity and a level of transparency we have not seen before by the BOE. Looking ahead, we have BOJ rate announcement early Thursday and US weekly jobless claims. ________________________________________ Ishaq Siddiqi Market Strategist at ETX Capital
Posted on: Wed, 07 Aug 2013 15:27:01 +0000
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