Comment: Fed stays on course with tapering/China’s pace of contraction accelerates
January 30, 2014 6:08 am
US Federal Reserve remained on track of unwinding its bond buying programme on Wednesday, cutting monthly purchases by another $10billion, now down to $65billion per month [starting in Feb.], in line with market expectations. There were no dissenters on the FOMC, the tone on the economy was relatively upbeat and forward guidance was reaffirmed [unemployment rate target still 6.5%] with no changes to it, indicating the Fed will continue cutting QE [most likely by $10billion] per month until the programme ceases to exist by the start of Q3 this year.
Despite the declines in US markets overnight, the move by the Fed is welcome in a broader context; the central bank has now set a precedent of how much it will cut by, offering the market a level of clarity and shows commitment that even in the face of some mixed data in January [softer conditions in labour market] the Fed has made its mind up and there’s no U-turning now. Some were looking for more from the Fed regarding the selloff in equity markets and the huge outflow of capital from the EM space, but the Fed sent a clear message that it believes the US economy is on track of its recovery. With the Fed looking like it is on autopilot, Janet Yellen will have to do little to change policy just yet other than continue carrying out Mr Bernanke’s work. Yesterday’s move however has now raised expectations of the first rate hike by the Fed to sometime in the first half of 2015; if QE ends by the summer of 2013, a rate hike in the H1’15 could be likely.
Overnight, Asian markets were rocked by the combo of Fed tapering and more importantly for the region, data which continues to point to contraction in Chinese growth – the HSBC PMI manufacturing report out of the country dipped into contraction zone to 49.5, raising fears that pace of the slowdown in China is accelerating beyond even the government’s expectations. Some may see this as a reason for policy makers in China to get into the mix with stimulating the economy with various measures, from more cash injections to allowing credit to flow freely to induce growth. Looking ahead to the day’s data agenda, we have German jobs data, UK M4 supply and mortgage approvals, euro zone confidence indicators and the preliminary reading of US GDP for the Q4.
US Federal Reserve remained on track of unwinding its bond buying programme on Wednesday, cutting monthly purchases by another $10billion, now down to $65billion per month [starting in Feb.], in line with market expectations. There were no dissenters on the FOMC, the tone on the economy was relatively upbeat and forward guidance was reaffirmed [unemployment rate target still 6.5%] with no changes to it, indicating the Fed will continue cutting QE [most likely by $10billion] per month until the programme ceases to exist by the start of Q3 this year.
Despite the declines in US markets overnight, the move by the Fed is welcome in a broader context; the central bank has now set a precedent of how much it will cut by, offering the market a level of clarity and shows commitment that even in the face of some mixed data in January [softer conditions in labour market] the Fed has made its mind up and there’s no U-turning now. Some were looking for more from the Fed regarding the selloff in equity markets and the huge outflow of capital from the EM space, but the Fed sent a clear message that it believes the US economy is on track of its recovery. With the Fed looking like it is on autopilot, Janet Yellen will have to do little to change policy just yet other than continue carrying out Mr Bernanke’s work. Yesterday’s move however has now raised expectations of the first rate hike by the Fed to sometime in the first half of 2015; if QE ends by the summer of 2013, a rate hike in the H1’15 could be likely.
Overnight, Asian markets were rocked by the combo of Fed tapering and more importantly for the region, data which continues to point to contraction in Chinese growth – the HSBC PMI manufacturing report out of the country dipped into contraction zone to 49.5, raising fears that pace of the slowdown in China is accelerating beyond even the government’s expectations. Some may see this as a reason for policy makers in China to get into the mix with stimulating the economy with various measures, from more cash injections to allowing credit to flow freely to induce growth. Looking ahead to the day’s data agenda, we have German jobs data, UK M4 supply and mortgage approvals, euro zone confidence indicators and the preliminary reading of US GDP for the Q4. 
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