Well this week is it hopefully. The week where the US Federal Reserve belatedly starts unwinding quantitative easing (QE) – and correcting for the distortions it has introduced into the global economy. I say ‘hopefully’, because while most Federal Reserve watchers think a taper is a done deal this week, the Fed itself hasn’t been anywhere near as clear. So that certainty could not, of course, be garnered from any public commentary made from the Fed.
Indeed Fed speakers have actually given conflicting signals on the matter – especially on the interpretation of data. Recall that QE was always going to be reined in, but Ben Bernanke made a point of stating that a lot would depend on the health of the labour force, and that the health of the labour force wouldn’t solely be determined by the unemployment rate. He implied that if the unemployment rate was driven by declining participation – which it is – then that would be grounds to delay the taper. As would a surge in bond yields, which is something, we’ve also seen.
On that basis, and if it wasn’t for the absolute certainty expressed by some I would think there was a high probability that the Fed wouldn’t taper this week. My personal view is that they should and that the data is clear enough for them to taper aggressively. But then the data was clear enough for them not to even engage QE3 in the first place. And yet they did. So all we have is Fed speak and there is just too much ambiguity based on Fed rhetoric. That said, when it comes to private briefings of public policy intent, the Fed has a worse reputation than the Reserve Bank.
In some respects the exact timing doesn’t matter anyway, because we know they will taper at some point soon. Rising asset prices and the strength of the US recovery demands it. We also can’t forget the fact the US budget position is much better off, so there is less need to monetise the debt.
Of more interest will be the speed at which they taper. This might be the big compromise between the doves and hawks on the Fed committee – start the taper but make is extremely modest – say $10 billion or so, and back it with some dovish rhetoric. On that note I think they’ll be vague about further reductions, they don’t want bond yields to spike to high and vagueness is the best defence for that.
Now the actual decision won’t be delivered till Thursday morning (AEST) so until then I expect trading to be relatively subdued till then. For today at least, we should see modest gains on the All Ord’s and the SPI was 0.2 per cent higher, following modest gains in the US and Europe (0.2-0.5 per cent). That’s especially the case as there isn’t a lot in the way of view changing data, domestically or abroad this week. In fact for Australia we only get the Reserve Bank’s minutes and car sales – both on Tuesday – and I think the minutes will be very boring and probably little changed from last time. Easing bias but on hold for now.
Elsewhere we see US industrial production tonight, US inflation data Tuesday night, housing starts Wednesday night, while on Thursday there is a run — initial jobless claims, US current account, Philly Fed index existing home sales.
Finally on Friday we get three Fed speakers Esther George, James Bullard and Narayana Kocherlakota. Other than that the key global data probably includes the German ZEW survey and China Property prices. As you can see, there’s nothing that will detract from the FOMC meeting.
The only other thing I’d note is the massive spike in the Australian dollar this morning — as I was writing this, the Australian dollar shot up almost a full cent to 0.9340. Interesting because commodity prices were belted on Friday night — gold down $22 ($1308), silver off 1.9 per cent, copper down 0.2 per cent and crude was 0.4 per cent lower ($108). That’s pretty much it, hope you have a good week.