Scoreboard: Taper turvy

Bond yields spiked and Wall Street fell after the Fed forged ahead with tapering but pulled back on talk of rate hikes.

As expected the Fed tapered another $US5 billion to $US10bn of Treasuries and $5bn of mortgage-backed securities. The Fed also changed its forward guidance, watering it down markedly so as to not really be providing any guidance at all. The move was precipitated by the Bank of England, and a number of Fed presidents expressed support.

So it was that the Fed dropped its reference to raising rates when the unemployment rate dropped to 6.5 per cent. Why? Because, as with the Bank of England, that target has pretty much already been met. As I argued at the time, they were never really targets and that has proven to be true. Instead they’ve adopted a much more qualitative approach, noting they will look at “a wide range of information”.

As it stands, 13 of 16 FOMC participants think that 2015 will be the appropriate time to raise rates, with most looking for a rate between 0.75 per cent and 1.5 per cent by year end. The median is around 1 per cent, whereas at December the median rate expected by the end of 2015 was 0.75 per cent.

Investors should note however that given the FOMC has such a cavalier attitude toward stated policy targets, its expectations for the Fed’s funds rate -- when it does start tightening -- contain no meaningful information. Not to mention the fact that 2015 is quite a way off. That said, there were some big moves in markets overnight based on the FOMC’s “rates guidance” -- especially in rates and forex markets.

Rates, it’s fair to say, did have a busy session -- seeing most of the action post-Fed -- and yields spiked higher. The US 10-year yield is up 11 bps to 2.77 per cent. The five-year beat that, rising 18 bps to 1.71 per cent, while the two-year yield is 8 bps higher at 0.43 per cent. Aussie futures in turn sold off aggressively: the threes were down 8 ticks (96.93) while the tens were down 11 ticks to 95.815.

Forex news saw the Australian dollar travelling around the 0.9120 mark up until the FOMC decision. On the Fed’s statement, the unit dropped 90 pips to sit at 0.9038 as I write. The euro too dropped like a stone, losing a big figure to sit at 1.3828 -- ditto the British pound at 1.6531. The yen is at 102.5 from 101.6 just before the decision.

Global equities generally sold off, especially on Wall Street. With about 40 minutes left to trade, the S&P500 was off 0.6 per cent (1861), the Dow lost 105 points (16,234) and the Nasdaq was down 0.7 per cent (4304). By sector, utilities, energy and industrials were the key underperformers. In Europe, the Dax was up 0.4 per cent, the CaC fell 0.1 per cent and the FTSE100 was 0.5 per cent lower.

Commodity markets saw gold slump. At the time of writing, it was down almost $30 to $1329. Silver then lost 1.2 per cent, although copper rose nearly 1 per cent. In the crude space, action was mixed. Brent fell 0.6 per cent to $105.9, but WTI rose 0.7 per cent to $100.35.

Elsewhere, employment in Britain rose another 105,000 in the three months to January, while the unemployment rate was steady at 7.2 per cent. Over in Europe, construction output surged 1.5 per cent in January after a 1.3 per cent spike the month prior. Annually, construction output is 8.8 per cent higher. In Crimea, Russian forces are taking control of military installations, even offering Ukrainian military officers positions in the Russian army!

In markets today, the SPI suggests Aussie stocks will lose 0.6 per cent. There isn’t a lot of data for Australia otherwise. Tonight the key figures include initial jobless claims, existing home sales and the Philly Fed index, all out of the US.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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