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Federal Reserve tapers monetary easing stimulus on the basis of strong jobs growth whilst dollar reaches five year high versus yen

Dec 19 • Morning Roll Call • 1714 Views • No Comments

shutterstock_146695835The key high impact news event of the day came with an element of surprise given that the majority of economists polled by either Bloomberg or Reuters predicted that the result of the two day FOMC meeting would not bring an alteration to the Fed’s monetary easing scheme. The Fed decided to taper by $10 billion a month, but in a carefully crafted narrative cited that they would monitor the situation carefully and would not hesitate to alter the programme should the effects on the markets be negative and react badly. The DJIA closed up a record high of 16167.

The outgoing chairman of the Federal Reserve, Ben Bernanke, announced at the end of the two day FOMC meeting that the USA would pull back on its massive economic stimulus programme, signalling the beginning of an end to five years of unprecedented government intervention in financial markets.

Bernanke, entering his final days as chairman of the US central bank, took many economists by surprise who expected the Fed to wait until the New Year to “taper” the so-called quantitative easing (QE) stimulus programme.

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the committee decided to modestly reduce the pace of its asset purchases.


In other news on Wednesday housing starts in the USA have exploded by circa 23% on an annual basis, way ahead of economists’ predictions. The ZEW index for the Swiss economy came in at 39.4, up 7.8 points on the previous reading.

In the UK the CBI have reported that UK retail sales have improved, hardly a surprise given the seasonal factor, but a welcome respite for a sector that’s incredibly valuable to the UK economy. Fitch also confirmed on Wednesday that the UK’s credit rating will remain at AA+, whilst in the USA the flash Markit economics services PMI came in up at 56.

Housing starts in USA jump by a massive 22%

Housing starts jumped 22.7 percent to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008, data from the Commerce Department showed on Wednesday in Washington. Permits for future projects held at almost a five-year high, indicating the pickup will be sustained into 2014.

ZEW Switzerland – Positive Economic Outlook

In December 2013 economic expectations for Switzerland have increased by 7.8 points. Accordingly, the ZEW-CS-Indicator of economic expectations has reached the 39.4 points-mark. This level was reached for the last time in May 2010 when the Eurozone crisis was in its early stages. The ZEW-CS Indicator reflects the expectations of the surveyed financial market experts regarding the economic development in Switzerland on a six-month time horizon. It is calculated monthly by the Centre for European Economic Research (ZEW) in cooperation with Credit Suisse (CS).

UK High Street sales recover their sparkle – CBI

Retail sales have recovered strongly in the year to December, bouncing back after two disappointing months, the CBI said today. Grocers, department stores and clothing shops, which had seen sales fall in the year to November, saw sales rebound strongly, according to the CBI’s latest Distributive Trades Survey of 106 firms. Retailers expect robust growth in sales volumes to continue in the year to January. Elsewhere, wholesalers’ sales were broadly flat on a year ago, for a second consecutive month, while sales were flat in the motor trade sector.

Markit Flash U.S. Services PMI

Services employment growth accelerates to record high. Services output continues to rise strongly supported by fastest increase in new business since April 2012. Strongest rate of job creation in survey history. Business expectations highest for almost three years. Data collected 5 – 17 December. Business activity in the U.S. service sector continued to rise strongly in December, as signalled by the Markit Flash U.S. Services PMI Business Activity Index. At 56.0, the ‘flash’ PMI reading, which is based on approximately 85% of usual monthly replies, was up slightly.

Fitch Affirms UK at ‘AA+’; Outlook Stable

Fitch Ratings has affirmed the UK’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AA+’. The issue ratings on the UK’s senior unsecured foreign and local currency bonds are also affirmed at ‘AA+’. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at ‘AAA’ and the Short-term foreign currency IDR at ‘F1+’. KEY RATING DRIVERS -The recovery of the UK economy has strengthened since our last review in April 2013. Quarterly GDP growth accelerated to 0.7% and 0.8% in 2Q13 and 3Q13, respectively.

Market overview at 11:00 PM UK time

The DJIA closed up 1.84%, a new record high at 16167, the SPX closed up 1.66% and the NASDAQ up 1.15%. In Europe STOXX closed up 1.13%, CAC up 1.00%, DAX up 1.06% and the FTSE up 0.09%.

Looking towards Thursday the equity index future for the DJIA is up 1.89%, SPX up 1.79%, NASDAQ future up 1.38%. Euro STOXX equity index future is up 0.88%, DAX up 0.88%, CAC up 0.97%, FTSE up 0.02%.

NYMEX WTI oil closed the day up 0.60% at $97.80 per barrel, NASDAQ nat gas down 0.30% at $4.27 per therm, COMEX gold up 0.40% at $1235.00 per ounce with silver on COMEX down 0.66% at $19.71 per ounce.

Forex focus

The U.S. Dollar Index, which monitors the greenback versus its 10 major counterparts, gained 0.5 percent to 1.021.53 late in New York. The greenback added 1.4 percent to 104.12 yen, the highest level since Oct. 6, 2008. The U.S. currency advanced 0.6 percent to $1.3685 versus Europe’s 17-nation euro. The dollar rose to a five-year high versus the yen after the Federal Reserve officials voted to reduce monthly asset purchases that are seen as debasing the U.S. currency amid signs that economic growth is strengthening.

The loonie, as Canada’s dollar is known, fell 0.9 percent to C$1.0703 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 93.56 U.S. cents. The currency’s decline stopped just short of the three-year low of C$1.0708 per U.S. dollar level reached Dec. 6th. It traded at C$1.0645 before the Fed release. The Canadian dollar posted its biggest drop in eight weeks after the U.S. Federal Reserve announced plans to begin trimming its monthly bond purchases starting in January amid signs of economic acceleration.

Bonds

The 10-year yield increased five basis points, or 0.05 percentage point, 2.88 percent late in New York. It climbed as much as nine basis points, the most since Nov. 20th, to 2.92 percent, the highest level in more than a week. The price of the 2.75 percent debt due in November 2023 fell 13/32, or $4.06 per $1,000 face amount, to 98 27/32. Treasuries fell after the Federal Reserve said it will reduce monthly bond purchases by $10 billion, putting policy makers on a path to a wind-down of unprecedented stimulus as the economy accelerates.

Fundamental policy decisions and high impact news events for December 19th

Thursday we receive data on Europe’s balance of payments which is predicted to print at €14.2 billion positive. Retail sales in the UK are predicted to come in at 0.3% up on the month.

USA unemployment claims are predicted in at 336K, down from 368K, existing home sales are predicted in at 5.04 million annual rate, a slight seasonal fall from the previous month. The Philly Fed manufacturing index is predicted to come in at 10.3, significantly up from 6.5 the previous month. Natural gas storage data is printed for the USA. Last week was down -81bn.

Late evening Japan publishes its monetary policy statement and the Bank of Japan holds a press conference.      
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