ETX Capital Daily Market Bite, 19th December 2013: Fed Pulls Taper Trigger; Santa Rally Begins
December 19, 2013 9:04 am
December 19th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist.
So, the Federal Reserve finally pulled the taper trigger to its bond buying programme yesterday, reducing the pace of asset purchases by $10billion to $75billion per month, starting from January 2014. Looks like Fed Chairman Bernanke wanted to go out with a big bang, hailing the end to what he started, his baby — the QE programme which has inflated the Fed’s balance sheet by around $4trillion since its inception in 2009.
The Fed also said purchases of Treasuries will drop to $40billion from $45billion and it will snap up $35billion of MBS versus $40billion — in the midst of adjustments to the bond-buying programme, Bernanke did reaffirm that the Fed will maintain ultra low interest rates for an extended period — a dovish stance on the whole. The language certainly had changed since October when the Fed decided to hold on policies, much to the surprise to the market.
Three months on, the fiscal situation in the US appears to be improving with the government shutdown back in October doing little to hurt economic growth, particularly jobs and the recent bi-partisan budget deal which will avert a government shutdown early next year. Let’s not also forget the improving conditions in the US economy, from consumer, business, manufacturing and housing activity all showing positive signs of growth.
Moreover, it was certainly the stellar jobs data for November which saw the unemployment rate drop to 7% which swayed the Fed into taking this step. Clearly, for the Fed, the 7% mark is comfortable enough to start unwinding with a bigger reduction expected when the rate falls to around 6.7% and an end at when it falls to 6.5%. At the same time, the Fed reckons that inflation will start to move up to its 2% target level in 2014, building a bolder case for the end of QE and perhaps the preliminary discussions to hike interest rates but that’s unlikely in 2014.
So, heading into the meeting, markets were as unsure as ever but participants had been adjusting their portfolios ahead of any action which appeared forthcoming as there was a credible case for Bernanke to get the ball rolling. He’s had the backing of fellow FOMC members including incoming Fed head Janet Yellen who endorsed the move too — the Fed is now on autopilot with its tapering process and if there’s one thing for sure, the central bank will most certainly not U-turn on this move unless of course the US economy deteriorates beyond the most bearish expectations, so we can make a confident enough assumption that by the end of 2014, QE as we know it will cease to exist.
December 19th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist.
So, the Federal Reserve finally pulled the taper trigger to its bond buying programme yesterday, reducing the pace of asset purchases by $10billion to $75billion per month, starting from January 2014. Looks like Fed Chairman Bernanke wanted to go out with a big bang, hailing the end to what he started, his baby — the QE programme which has inflated the Fed’s balance sheet by around $4trillion since its inception in 2009.
The Fed also said purchases of Treasuries will drop to $40billion from $45billion and it will snap up $35billion of MBS versus $40billion — in the midst of adjustments to the bond-buying programme, Bernanke did reaffirm that the Fed will maintain ultra low interest rates for an extended period — a dovish stance on the whole. The language certainly had changed since October when the Fed decided to hold on policies, much to the surprise to the market.
Three months on, the fiscal situation in the US appears to be improving with the government shutdown back in October doing little to hurt economic growth, particularly jobs and the recent bi-partisan budget deal which will avert a government shutdown early next year. Let’s not also forget the improving conditions in the US economy, from consumer, business, manufacturing and housing activity all showing positive signs of growth.
Moreover, it was certainly the stellar jobs data for November which saw the unemployment rate drop to 7% which swayed the Fed into taking this step. Clearly, for the Fed, the 7% mark is comfortable enough to start unwinding with a bigger reduction expected when the rate falls to around 6.7% and an end at when it falls to 6.5%. At the same time, the Fed reckons that inflation will start to move up to its 2% target level in 2014, building a bolder case for the end of QE and perhaps the preliminary discussions to hike interest rates but that’s unlikely in 2014.
So, heading into the meeting, markets were as unsure as ever but participants had been adjusting their portfolios ahead of any action which appeared forthcoming as there was a credible case for Bernanke to get the ball rolling. He’s had the backing of fellow FOMC members including incoming Fed head Janet Yellen who endorsed the move too — the Fed is now on autopilot with its tapering process and if there’s one thing for sure, the central bank will most certainly not U-turn on this move unless of course the US economy deteriorates beyond the most bearish expectations, so we can make a confident enough assumption that by the end of 2014, QE as we know it will cease to exist.
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