US Opening Call from Alpari UK on 18 September 2013
BoE shuns monetary stimulus as Fed seeks to scale back
Today’s US opening call provides an update on:
- BoE MPC minutes point to a lack in appetite for further easing
- Markets gear up for potential start of Fed tapering
- Building permits provide final notable data point prior to Fed decision
Global markets are today bracing themselves for the potential commencement of a reduction in the current rate of asset purchases. Despite the expectations of such a bearish event, European, Asian and US indices are pointing higher in a nod to the fact that not all will be as it seems in such a hard to read and complex market event.
In the European session, the major driver of volatility has come in the form of the Bank of England’s MPC minutes from 3-4 September. The minutes came in largely as expected, with votes of 9-0 against both additional asset purchases or reduced interest rates. This comes amid a particularly restrictive period for the MPC, where CPI is required to fall as a means to validate the forward guidance stance recently taken under Mark Carney. For this reason, any measure of monetary loosening would be counterproductive in enabling their newly established tool of choice by raising expectations of the direction inflation would be moving in the medium to long term.
The main event of the day comes in the form of the FOMC meeting later today where market expectations point towards a reduction in the pace of asset purchases. There are a number of factors to bear in mind for the event, many of which will make it unpredictable for even the best and most knowledgeable market participant. The view that the current $85 billion monthly asset purchase programme should be reduced was first proposed by Ben Bernanke in May, with the primary measure being in association with the strength of the jobs market. The ability of reach 7% was widely touted as the end goal at which point the value of asset purchases should be reduced to zero. However, the path to such a scenario was always likely to be a bumpy one, where the initial reduction would be the most unpredictable as far as the markets are concerned.
The pathway to today’s decision has been largely positive from an economic standpoint, where unemployment has fallen to 7.3% and the most recent unemployment claims figure fell below the levels seen prior to the 2007 crisis. However, this is only half of the picture, with a participation rate at the lowest ebb since 1978 which saw 312,000 people drop out of the labour force between July and August. Given the unemployment rate only counts those workers who are actively seeking work, the unemployment rate fell. For this very reason, the validity of recent improvements are called into account and provide a potential scenario whereby any taper could be accompanied by a revised unemployment rate target for the end of QE.
In terms of expectations, markets are varied, with the majority expecting a taper of between $10-15 billion. However, there are many who believe that the Fed remains notably dovish given the questions hanging over some of the jobs data and for that reason would favour a more moderate figure around $5 billion, where the target unemployment rate for the conclusion of asset purchases would be lowered from 7% to a figure closer to 6.8%. Should this occur, markets would likely rally given the longevity it would give to the continuation of QE where the last 0.5% reduction in QE took almost a year, thus pushing the date to the end of Q3 or early Q4 2014 as opposed to the ‘mid-2014′ timeline provided by Bernanke earlier this year.
Ultimately, the ability of markets to withstand the reduction in asset purchases to zero was always going to be called into question, given each previous episode of QE has typically preceded a tumble in the stock markets. Those very same markets that are driven to all-time highs directly from the boost provided by such monetary stimulus. What markets are seeking is a sense of direction, which given the current positivity surrounding global markets, could potentially remain northbound for the meanwhile. However, as tapering continues to take effect throughout 2013-2014, and markets return to a ‘good data is good for the markets’ scenario, the question remains as to whether the current dizzy heights of the indices remain viable.
Looking ahead, the building permits figure is likely to provide the only other notable release prior to the FOMC minutes. Expectation is for a stable 0.95 level, consistent with last month’s release. However, a significantly negative figure could point towards signs of weakening in the housing market, which could in turn impact the Fed’s willingness to cut the MBS element of the current asset purchase scheme.
US markets are expected to open higher, with the S&P500 +1.5 and the DJIA +11.5 points.