SCOREBOARD: Fed fear frenzy

An overreactive market saw US bond yields soar and equities tank despite little drama in the latest Federal Reserve statement.

Okay – well there were some big market moves last night, especially on the rates side of things where yields shot higher. Naturally, the Fed has caused a stir – it’s what they do, people, although they didn’t actually announce a ‘QExit’. Indeed the FOMC's press release didn’t give much away at all and I’m struggling to see much that was really new.

The Fed noted that “economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further”.

Nothing too different from last time. Indeed, the statement was little changed and the Fed even noted that “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” With all the talk of a taper, the FOMC themselves are still talking about printing more and in that regard it’s not insignificant that one of the voters, James Bullard, dissented with the decision, thinking instead that they should signal a willingness to defend the inflation target against low inflation. The krumping never stops in that place – mo’ money.

So then why did US 10-year yields rise 18 bps or so to 2.32 per cent? Why did the 5-year spike nearly 20 bps (1.248 per cent)? Upgraded growth (for 2014) forecasts perhaps? Maybe, but then these upgrades were very minor (from 2.9-3.4 per cent to 3 per cent-3.5 per cent) and core inflation forecasts were actually revised down (from 1.7-2 per cent to 1.5-1.8 per cent).

Similarly, Fed chairman Ben Bernanke’s comment that “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year…If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year” isn’t really new info, is it?

The point for me is that there is still no reference to a ‘substantial’ improvement in the labour market and inflation was revised down. So I don’t think the Fed was really being hawkish at all, to justify the market reaction. It goes to show the problems markets have when central banks use vague qualitative terms like ‘substantial’. It’s no wonder markets are so skittish.

Don’t go thinking that it stopped in the bond market though – the Australian dollar lost 2.5 cents in the space of – ooh, about a couple of hours, and sits at 0.9297 as I write. The euro then lost a big figure (now at 1.3297), the British pound lost two (1.5481) and the yen sits at 96.3 from 95.2.

Confronted with all of that, US equities tanked – nearly all the losses post-Fed – broad-based across sectors, though falls were especially hard in the telco and utilities space. At the close the S&P500 was down 1.4 per cent (1628), the Dow lost 206 points (15,112) and the Nasdaq was down 1.1 per cent (3443).

All in all a fairly gross overreaction in my opinion, but then this monster is of the Fed’s own making. And Bullard wants to keep the abomination alive! All we can do is wait and watch. Other news was simply not a patch on the Fed, although it is worth noting the bounce back in eurozone construction in April – up 2 per cent following a fall of 1.8 per cent.

So then looking at the day ahead, there isn’t much. Aussie stocks will obviously be hit today and the SPI suggests something in the order of -1.1 per cent. Not much to match the Fed though for the rest of the day – our bros in New Zealand release their GDP statistics at 0845 AEST for those interested, then about 3 hours later we see a ‘flash’ estimate of China’s manufacturing PMI. Tonight, and for the US, we see initial jobless claims, existing home sales and the Philly Fed index. Other than that there are a few minor pieces like UK retail sales and the eurozone PMIs.

Have a great day… 

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