Scoreboard: Fed guessing games

'Many' Fed members want tapering to start this year, but that's no guarantee we're moving closer to the end of QE.

Alas! Confusion still reigns! Unfortunately, the Fed minutes didn’t really offer to much in the way of additional information about a QE taper. Let the guessing games begin!

Now at the moment, “most participants look for economic growth to accelerate in the second half of 2013” and a comment in the back pages that “about half about half of these participants indicated that it likely would be appropriate to end asset purchases late this year”. However this doesn’t mean that the Fed will automatically start tapering soon. Even following strong jobs gains.

Why? Because none of that is enough and I think there is just too much division. So while half wanted to end QE this year, half don’t – and of the half that do, how many are actual voters? Moreover, that view is predicated on quite robust growth assumptions.  It’s not surprising then that “many members indicated that further improvement in the outlook for the labour market would be required before it would be appropriate to slow the pace of asset purchases. Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

Focus on the key words here – ‘many’, that’s the majority want to see ongoing gains in labour – but at what point will they be convinced? That isn’t made clear.

So I’m not as convinced as some that the taper will start soon, as much as I would love to see it...  Again it’s guess work, with policy being so opaque and there is no economic analysis here my view hinges on one word: “several”. You see it really was only “several members [that] judged that a reduction in asset purchases would likely soon be warranted”. Several is a minority on a 12-member committee and so that doesn’t sound like September is going to happen. Don’t get me wrong, I think they should taper; they should have already tapered and raised rates to 1 per cent by now.

Right, now in terms of the market reaction, well there wasn’t one in the end. Momentum was almost non-existent prior to the release of the minutes and the market was flat. Stocks spiked, about 7 points on the S&p500 ( 0.4 per cent) in the first 30 minutes after the minutes but then settled back down by the end of the first hour at the close we were back to nothing – S&P500 0.02 per cent (1652), Dow -8 points (15291) and Nasdaq 0.5 per cent (3520). You can see from that tech stocks outperformed, as did healthcare and utilities.  

US Treasuries bounced around on a 6 basis point range but ended virtually unchanged at 2.63 per cent – again highlighting how little we actually learned from the minutes. Commodities in contrast got a solid boost: crude was up 2.5 per cent to $106.2, copper was up almost 1 per cent and gold rose $13 to $1258.

As for the consumer confidence numbers, June’s strong 4.7 per cent gain was held in July and that’s the key positive. The Reserve Bank holding rates steady has calmed nerves somewhat as we saw in June and the fact they didn’t cut in July allowed those gains to be held. Confidence is still weaker than before rates were cut through and with Australian economists champing at the bit for even more rate cuts – cause the 200 basis points worth to date has been oh so effective – we might see confidence deteriorate further. That’s especially the case given the slump in the Australian dollar. This of course makes consumers – two-thirds of the Australian economy – worse off. 

Bits and piece otherwise. In the US, wholesale sales surged 1.6 per cent in May, much stronger than the consensus forecast and following a 0.7 per cent rise in April. Looks like that strong growth caught wholesalers off guard as inventories fell 0.5 per cent. Elsewhere, German inflation remains elevated at 1.9 per cent year-on-year. The European recession is having very little downward impact on inflation, which should be concerning to policy makers, but they are oblivious. Over in China, trade stats have sparked the usual bout of alarm, however they should be interpreted with extreme caution - well known measurement and political issues.  I think it will be some time before we get a true sense of where Chinese trade is at. Suffice to say, the broad spread of indicators suggest trade growth is stronger.  

Have a great day...

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