Who would have thought it? The Federal Reserve decided today that it would actually taper. It’s a miracle, a Christmas miracle! If you’re hearing a strange roaring in your ears, don’t fret, it’s not tinnitus; it’s the sound of billions of people around the world cheering. The end of the Great Tyranny! Well not quite, because when I say taper I’m being generous. The Fed only cut its bond buying to $75 billion from $85 billion each month. It’s still printing loads of money, just $10 billion less of it each month. Realistically, given the strong dataflow out of the US, it’s less than the bare minimum the Fed should have done. So this doesn’t make up for that at all and doesn’t restore its credibility, but it’s a start I guess. Small mercies etc. In terms of the split, the Fed has cut mortgage-backed securities purchases by about $5 billion and the same for Treasuries.
Now, in the lead up to the decision, markets had done little – something had spooked the bond market and yields did push higher – no doubt the Fed giving the heads up to primary dealers, you know the early distribution list – but the bid came on and yields fell on the Fed’s decision – currently down about 3 bps at 2.84 per cent – the bond market was perhaps expecting more. That done, and post the decision, a decent bid had actually come on for equities (at the time of writing), and the S&P500 went from red, to black. At the time of writing, the S&P500 had put on 0.6 per cent post the Fed’s decision, to be 0.6 per cent higher for the session. It still looks pretty volatile though. The Dow itself is up 139 points for the session thus far, although the Nasdaq is flat. There’s still some time to the close though, and it’s very whippy.
Price action elsewhere was a little more sedate. For commodities, crude is higher, although most of the gains occurred prior to the Fed and WTI actually weakened after. As I write Brent is 1.1 per cent higher, at $109.4, West Texas Intermediate is 0.3 per cent higher, at $97.55 and copper and gold are up smalls. Then for forex, the Australian dollar whipped around, hitting a low of 0.8855, but was bid straight back up and is a little stronger (40pips or so) as I write, from yesterday at 0.8940. Ditto the euro at 1.3802, although the yen weakened a bit (JPY rose) to 103.3 from 102.8.
So where to from here? That’s a tough one. In terms of the Fed’s economic projections, they made tweaks here and there, with the net effect of upgrading growth marginally (click here to see the forecasts), but nothing dramatic. They still look for economic growth next year from the high twos to the low threes – above trend – then they reckon the unemployment rate will be around 6.5 per cent and core inflation around 1.5 per cent. Not a bad set of forecasts, all up.
“If incoming information broadly supports the committee's expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings,” the Fed said.
They went on to say that a tapering was not on a pre-set course and that actual rates would remain ultra-low (between 0 and 0.25 per cent) “at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's two percent longer-run goal”. So on their forecasts above, at least a good two years or more. It’s probably a good bet they’ll taper slow, and as a guess they’ll be doing it most of next year.
So then to other news, and US housing starts jumped 22 per cent or so in November, to their highest level in 5 years. Phew, lucky the Fed tapered. Then for Europe, construction work fell 1.2 per cent. Oh, I should mention as well that UK unemployment fell to 7.4 per cent from 7.6 per cent in the three months to October, which is the lowest rate in about four-and-a-half years. Moreover, the country experienced a 250,000 increase in employment over that period. Most of those, around 66 per cent, were full-time permanent jobs.
The German IFO survey showed the business climate is improving, if just marginally, with the index up to 109.5 from 109.3, the highest level since April 2012. That in itself is a great outcome though, as the index is well above the average of 101.
For our market today then, the SPI suggests a 0.5 per cent increase for our market so far. Then in terms of data flow there is nothing really to match the Fed. Maybe New Zealand GDP at 0845 AEDT. Then at 1130 AEDT we get the RBA’s FX transactions, which could be interesting, while tonight the key data is initial jobless claims for the US, alongside existing home sales, a speech from the Fed’s Fisher and the Philly Fed index.
Have a great day…