SCOREBOARD: Fed easing fears

US markets fell following poor housing figures, but the bigger issue was the Fed's quantitative easing end-talk.

Sentiment took a hit overnight, notionally on the back of some disappointing housing figures out of the US. With about an hour left to trade, the Dow is off 73 points (13,963), the S&P500 is off 0.9 per cent (1517) and the Nasdaq is 1 per cent lower (3180). New starts fell 8.5 per cent in January which was weaker than the consensus expectation of about 3.5 per cent. Thing is though, it comes after an almost 16 per cent gain the month prior and, more to the point, building permits rose again – up 1.8 per cent. So I don’t think this data really mattered to be honest. In the absence of anything else I think it's juts a pullback – more sellers than buyers, that sort of thing.

The bigger issue is quantitative easing, and in the lead-up to the Federal Open Market Committee minutes this morning, commodities across the spectrum took some big hits.

Gold in particular was off $32 and now sits at $1570; crude was hit to the tune of 1.9 per cent ($95.85); and copper fell 1.3 per cent. Why? Because the talk is heating up about an end or a tapering to quantitative easing. As is often the case in the face of solid data and a strong stock market rally, the drum is beating more loudly now. So, enter the FOMC minutes, which make it clear that "a number" of participants think it’s the right thing to do to if conditions permit. Specifically, "A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred.”

We don’t know how many that "number" is and I think it’s clear that a reasonable person would want to do exactly that – jobs growth is strong, the unemployment rate has fallen sharply etc. The fact is the emergency is over and yet the Fed still prints. It’s inexcusable. Anyway, that comment is getting a lot of attention to the point where some Fed members are even talking about it. I wouldn’t get too excited though, there is little to no chance of quantitative easing ending while Obama is running massive deficits, and indeed what is less quoted is the fact that "Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred.”

So the debate might be heating up, commodities might be getting smashed on the back of it and we may even see that stock market correction. I doubt the Fed is about to end quantitative easing though. Bernanke, Dudley and Yellen (the main policy extremists) have no appetite for it.

Looking at rates, they traded within a narrow range – US Treasuries within a few basis points on the 10-year (at 2.029 per cent), so not too much going on there. For interest, the 5-year is at 0.87 per cent and the 2-year is at 0.27 per cent. Aussie futures were up about 2 ticks a piece to 97.11 on the 3s and 96.46 on the 10s.

Otherwise we saw some big moves in the forex space, largely the US dollar buying on the quantitative easing end-view. The British pound slumped two big figures on that and the Bank of England minutes, which showed the governor, Mervyn King, and two other committee members voted to print more money. The euro was down about 190 pips to 1.3279 and the Australian dollar fell 110 pips to 1.024. The yen went from 93.22 to 93.75.

In other news, in the United Kingdom employment growth accelerated in the three months to December, with 154,000 jobs created over that period, up from 90,000 in the previous period. That said, the unemployment rate edged up to 7.8 per cent from 7.7 per cent. Then in the US producer prices rose by 0.2 per cent in January, with core rates rising an annual 1.8 per cent on year.

So to the day ahead, there is no data but there is a slew of earnings reports from companies such as Origin, Qantas and Brambles. Abroad, we see a business sentiment indicator out of China around lunchtime; European PMIs tonight; and then for the US we see consumer prices, the Philly Fed index, existing home sales and some Fed speak (Bullard and Williams).

Have a great day…

Adam Carr is a leading market economist.

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