The Overnight Report: Taper Surprise!

  • Rate this Story
  • 0
  • 0

December 19, 2013 10:11 AM EST

By Evan Lucas, Market Strategist IG Markets

Good Morning

Dovish taper hawkish surprise from the Fed

The market finally got its wish from September for a dovish token taper of $10 billion split evenly over mortgage-backed securities and treasuries. This means from January 2014 the Fed will buy the two debt instruments at $75 billion a month, rather than $85 billion.

This can be taken as a slight hawkish surprise as only a third of economist surveyed predicted December would be the start of taper. The other reason for a hawkish call is the dissenting vote shifted from the hawks to the doves for the first time since QE1.

The most hawkish voting member on the FOMC is Kansas President Esther George, and for the first time this year as a voting member she didn't dissent. While on the other side of the ledger, the biggest voting dove on the board Boston President Eric Rosengren dissented from voting for the first time as the hawks finally got their way.

The expectation now is that if the labour market continues to show solid signs of improvement, and inflation doesn't unexpectedly drop out, then the inferred meaning drawn from this statement: 'will likely reduce the pace of asset purchases in further measured steps at future meetings,' would suggests that by October 2014 the monetary part of the QE stimulus program will be completely unwound.

However, there were several enhancements in forward guidance in the fund rate, which should be supportive and are dovish in nature. The key summary statement for the Fed funds rate is this:

"The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee's 2% long-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."

This shows the clear disassociation (something it has been good at communicating) between the unwinding of stimulus and monetary tightening. The statement above suggests that even if employment drops to the 6.5% threshold, the forward guidance suggests that it won't necessarily trigger a move in the Fed funds rate as unemployment is expected to hit 6.2% this time next year, and it may be the case that monetary stimulus is still in the market if the unwinding isn't uniformed.

So, despite the fact unemployment is now expected to be 6.2% in December 2014, over two thirds of the board believe the first tightening measure will come in 2015, with some even calling 2016 as the first tightening move. The medium FOMC forecast for the Fed funds rate at the end of 2016 is 1.75%.

This would explain why the flows desks have seen some classic moves post the announcement, with equities taking this in its stride, the Dow only two points from record highs, the USD strengthening, the JPY weakening (as did the AUD) and gold following suit. This suggests even with the 'safety catch' moving to off, the market is free to move higher.

Ahead of the Australian open

The news out of the US is a boost for the local equity market and a downward force on the local currency; both of which are net positives.

We are currently calling the ASX up 56 points to 5154 or 1.1% as the weakening dollar drives the cyclical stocks and the move from the Fed saw industrial metals and oil bounce, adding additional support.

BHP's ADR is showing the positive leads from the US are flowing positively to the stock with the deposit receipt suggesting 72 cents could be added, taking BHP to $36.51 +2.01%. The green on screen should be universal, even with gold sliding.

This isn't a Santa rally, but will finally add some much-needed support to a market that has lost 7% in the past eight weeks.

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).

Author's disclaimer:

This material does not contain (and should not be construed as containing) financial advice, recommendations, opinions in relation to acquiring, holding or disposing of a CFD, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG is not a financial adviser and all services are provided on an execution only basis. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently any person acting on it does so entirely at his or her own risk. The research does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. This communication must not be reproduced or further distributed. Issued by IG Markets Limited 84 099 019 851, AFSL 220440.

Greg Peel is on a well-deserved break until Monday, 13th January. This week, which is FNArena's final week before we all start enjoying a well-deserved break, we will borrow the Overnight Report from third party content providers.

All

  • Rate this Story
  • 0
  • 0
Copyright FNArena All rights reserved.

Join the Conversation

IBTimes TV