THE BIG PICTURE • #FOMC likely to remain on hold The #dollar continued to recover overnight, gaining against most #G10 #currencies. It rose the most against JPY and CHF while gold was the biggest loser, indicating that the perceived need for safe haven assets is diminishing. Once again the market ignored weak US data. Although retail sales rose in line with expectations, that was data for September; the October #consumer confidence figure fell far more than anticipated as the expectations index collapsed and the “jobs hard to get” measure moved back up. Yet stocks rose for the 13th day out of 15 on low volume (owing to an absence of sellers) as the flow into equity funds in #October was the fifth highest on record. One can only conclude that investors are anticipating a continuation of the #Fed’s loose #monetary policy at today’s FOMC meeting, although why that should support the dollar is a mystery to me. • I think the most likely result of today’s meeting will be that the FOMC decides to “wait and see.” The committee has made it clear that it wants to begin #tapering off its monthly bond purchases as soon as the economic outlook allows. At the September meeting, when they voted to delay tapering, only two of the 17 participants said it should begin later than December. Since then, the economic news has been mixed. In particularly, payrolls have been disappointing, averaging less than #150k a month although the unemployment rate has fallen steadily. On the other hand, the fiscal uncertainties that encouraged the FOMC to delay have passed (for now) and financial conditions, which they noted specifically as a concern, have eased notably (30-year mortgage rates are now 4.13% vs 4.57% before the September meeting). So while the odds are against them beginning to taper at this meeting, it’s not impossible that they cut a small amount, say $5bn a month. It certainly would be possible by #December if the #data improves. On the other hand, if they focus on the worsening employment picture, declining confidence, and soft capital goods orders and home sales, they could even consider increasing their bond purchases! Given these contradictions, the most likely decision in my view is that they feel they don’t have enough information yet to change policy because of the delay in data releases and they decide to “wait and see.” • The question then becomes, when can they start #tapering? That will be decided by the data. Currently the market seems to be assuming the process begins in March, but it could start as early as December if the data allows. Look for the market to become more data-driven over the next month. • The #European day today starts with #German #unemployment for October, which is expected to remain unchanged at 6.9%. Eurozone final consumer confidence for October is estimated to remain at -14.5. Later in the day, the preliminary German CPI data for October is coming out; the national CPI is forecast to show no change from the previous month, the same as in September. This would bring the yoy rate down to +1.5% from +1.6%. As for US indicators, the ADP employment change for October is expected to fall to 150K from 166K in September, which could be USD-negative even on an FOMC day. Both the headline and the core #CPIs for September are expected at +0.2% mom, a faster pace than +0.1% mom in July, but with neither inflation nor deflation a policy concern right now, that isnt likely to be #market-affecting.
Posted on: Wed, 30 Oct 2013 08:35:21 +0000
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