Scoreboard: Fence-sitting Fed

Wall Street fell in the wake of the Fed's upbeat economic view and its noncommittal tone on a taper timeline.

I think this paragraph sums up the Fed’s view:

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

That’s a fairly upbeat statement on the economy and one that is appropriate for the most part. Yet, and as I wrote on Monday, the Fed is trying to keep the discussion of a taper alive without actually delivering on it – and that’s more than evident in the statement.

The fact is, the US is on a sustainable growth path already. It has been for a long time, and if the Fed can’t see that now, what’s going to change its mind over the next month? Private demand is strong, jobs growth is strong. These are facts. It’s also a fact that strong jobs gains are being described as weak or disappointing. That trend will continue.

So what’s going to change for the FOMC? I don’t think anything will. Yet note that Fed watchers are still talking as if the December meeting were ‘live’. I doubt that very much and would go so far to say that there is almost no chance that the December meeting is live – and it has certainly got nothing to do with the data. History and the Fed’s own actions have proven this.

Despite that, US stocks reacted to the Fed’s cautiously upbeat view and the commentary around a December taper badly. As I write, the S&P500 is off 0.5 per cent (1763), the Dow is off 60 points (15,618) and the Nasdaq is down 0.6 per cent (3927). The major stock sectors were dealt fairly evenly.

Interestingly though, the US 10-year bond yield pushed higher, if only modestly (a couple of bps to 2.53 per cent), which indicates the market sees less chance of a taper in December. Indeed yields spiked 6 bps after the FOMC decision.

Similarly, the US dollar strengthened while the Australian dollar dropped 50 pips to 0.9442 after the FOMC, following the euro and British pound, both of which fell about 65 pips or so. Compared to 1630 AEDT yesterday, the Australian dollar is now little changed at the time of writing at 0.9472 – same with the euro, at 1.3729.

Price action elsewhere was mixed. Commodities are doing their own thing with no rhyme or reason. Gold was little changed at $1343, copper rose 1 per cent and crude fell 1.6 per cent ($96.69), apparently on a report that showed crude stocks rising for the sixth consecutive week as refineries closed down for seasonal maintenance.

There were a few bits and pieces otherwise. The ADP employment report showed US jobs rising to 130,000 in October, which missed expectations for a 15,000 increase, although the result itself is still a good one. Otherwise the US CPI rose 0.1 per cent in September on the core measure, with the annual rate little changed at 1.7 per cent year-on-year from 1.8 per cent. Over in Europe, the eurozone business climate indicator improved, rising to -0.01 from -0.19, while German inflation moderated to 1.2 per cent year-on-year in September from 1.4 per cent year-on-year.

That’s about it. Looking at the day ahead, the SPI points to a 0.4 per cent fall in the local market. The key macro data for the day are domestic building approvals, private sector credit numbers and trade prices, all coming at 1130 AEDT. Global data includes German retail sales and eurozone unemployment and inflation numbers, while for the US the key data will be initial jobless claims.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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