The DJIA and other main USA indices suffered quite a significant sell off during the later stages of the New York session on Wednesday due to the (you’ve guessed it) rumours of the infamous taper arriving sooner rather than later. And the ripple-effect was also felt through the FX industry.
Many analysts and therefore investors are responding to various reports that the Fed may begin its tapering exercise from as early as next week. The anticipated reduction by the consensus will be from $85 billion a month to $75 billion a month. Once again ‘the market’ has voiced its displeasure at the intended taper; the mention of the taper caused a selloff of circa 1%, over to you Fed…
In a speech given to the National Institute for Economic and Social Research, Martin Weale, a member of the UK’s Monetary Policy Committee, explained some of the theoretical issues around what’s being termed “forward guidance” and offered his initial thoughts on what its impact has been so far in the UK.
He outlined the strengths of the state-contingent forward guidance adopted by the MPC over a simpler time-contingent version with which Bank Rate would be held down for a fixed period. In particular, he argued that the fact people cannot be certain about when the relevant state – in the case of the MPC, the 7 per cent unemployment threshold – will be reached is a strength of the policy. He said: [quote]The future is uncertain and no one can change that. What is important is that the MPC reacts appropriately to events as they evolve.[/quote]
Yesterday this column discussed the head of the IMF, Christine Lagarde and her call for action versus the spectre of youth unemployment, which is casting a shadow of despair over the majority of Europe, in particular the PIIGS.
The troika are back in Greece, once again attempting to negotiate the next round of assistance and with interesting timing Ms. Lagarde’s words were echoing throughout Greece as the latest unemployment figures were published. The rate has increased to 27.4%, that’s a 5.9% annual increase. And youth unemployment is now registered at 51.9%.
NZ OCR unchanged at 2.5 percent
The Reserve Bank of New Zealand left the Official Cash Rate unchanged at 2.5 percent on Wednesday evening. Reserve Bank Governor Graeme Wheeler said: [quote]Growth remains moderate but mixed for New Zealand’s main trading partners. Nevertheless, export prices for New Zealand’s main commodities, and especially dairy produce, have continued to increase.[/quote] New Zealand’s GDP is estimated to have grown at over 3 percent in the year to the September quarter and the expansion in the economy has considerable momentum. New Zealand’s terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by.
Greece’s unemployment rate has risen to a new record high
ELSTAT, the country’s statistics body, reported that the number of people classed as unemployed rose by 14,023 between August and September. That pushed the jobless rate up to 27.4% in September, up 0.1 percentage point on August’s 27.3%. The number of unemployed people rose by 14,023 persons in September to 1,376,463, a 1% increase during the month.
But the number of people in work also rose, by 5,397, to 3,639,429. Those classed as inactive (not working or looking for work) dropped by 5,296 persons, which may suggest more people are now trying (and failing) to find a job. Still, on an annual basis, the unemployment total is up by 5.9% and the employment total is down by 1.5%. And the youth jobless rate remains at a desperate rate of 51.9%.
Fitch on the US budget deal
Rating agency Fitch says the bipartisan budget proposal announced last night shows “an improvement in the functioning of budget policymaking”, but cautions that the US debt ceiling must be addressed by early February.
[quote]The US bipartisan budget proposal announced on Tuesday signals an improvement in the functioning of budget policymaking, Fitch Ratings says. It suggests a lower risk of further political brinkmanship around budget policy precipitating another government shutdown or debt ceiling crisis, which would damage the US economy and perceptions of US sovereign creditworthiness. As we have previously stated, we expect to resolve the Rating Watch Negative on the US ‘AAA’ sovereign rating by end-1Q14 after conducting a review, although timing will reflect the resolution of the FY14 budget discussions and further debt ceiling developments. The review will focus on projections for US public finances and our assessment of the impact of the debt ceiling crisis on US creditworthiness.”[/quote]
Market overview at 10:00 PM UK time
The DJIA closed down 0.81%, the SPX closed down 1.13% and the NASDAQ down 1.40% on rumours that the Fed may finally begin tapering next week, from $85bn to a suggested $75bn. European markets also sold off, but not as severely; STOXX closing down 0.46%, CAC down 0.10%, DAX down 0.41%, UK FTSE down 0.24%.
NYMEX WTI oil closed down on the day by 1.13%, at $97.41 per barrel, with NYMEX nat gas closing up 2.43% on the day at $4.34 per therm. WTI advanced 5.3 percent last week, the most in five months, as U.S. crude inventories fell for the first time in 11 weeks and TransCanada Corp. announced plans to start part of its Keystone pipeline to the Gulf Coast from Cushing, Oklahoma, the delivery point for NYMEX futures. COMEX gold closed down 0.61% at $1253.40 per ounce with silver at $20.28 down 0.17% on the day.
The DJIA equity index future is (at the time of writing) down 0.89%, SPX down 1.24% NASDAQ down 1.31%. Looking towards Europe’s open the STOXX 50 future is down 0.61%, DAX future is down 0.54%, CAC future is down 0.34%, FTSE future down 0.81%.
Forex focus
The yen rose 0.3 percent to 102.52 per dollar mid-afternoon New York time, after sliding to 103.39 yesterday, the weakest level seen since May 23rd. Japan’s currency added 0.1 percent to 141.33 per euro after depreciating to 142.17 yesterday, the least since October 2008. The 17-nation currency rose 0.2 percent to $1.3787, touching the strongest level since Oct. 29th.
New Zealand’s currency slid 0.4 percent to 82.81 U.S. cents after weakening as much as 1.3 percent. Australia’s dollar fell, snapping its longest winning stretch in seven weeks, before a report Thursday that is forecast to show the nation’s unemployment rate rose. The Aussie depreciated 1 percent to 90.63 U.S. cents. New Zealand’s central bank stepped up its inflation-fighting rhetoric and signalled it will start raising interest rates in the first half of next year as the economy strengthens, sending the currency higher.
The yen has weakened 19.1 percent during the past year, the biggest decline amongst the 10 developed-nation currencies tracked by Bloomberg’s Correlation-Weighted Indices. The euro has gained 9.9 percent and the dollar advanced 3 percent. The yen strengthened from almost a six-month low versus the dollar as a decline in global equities spurred demand for the currency as a haven, amidst speculation that its recent drop has been too rapid.
The pound declined by 0.5 percent to $1.6361 late afternoon London time after rising to $1.6466 Tuesday, the highest level since August 2011. Sterling fell 0.8 percent to 84.31 pence per euro after depreciating to 84.32 pence, the weakest since Nov. 13th. The pound has risen against 13 of its 16 major counterparts in the past three months. The pound fell from a two-year high against the dollar as Bank of England policy maker Martin Weale said there has been a “sharp and unexpected” decline in inflation since the summer.
Bonds
The benchmark 10-year yield climbed five basis points, or 0.05 percentage point, to 2.85 percent late afternoon in New York, after falling seven basis points during the previous three days. The price of the 2.75 percent security due in November 2023 dropped 13/32, or $4.06 per $1,000 face amount, to 99 1/8. Treasuries snapped a three-day advance due to speculation a U.S. budget agreement will support the economy and make it easier for the Federal Reserve to start reducing bond purchases. The government sold $21 billion of 10-year notes to weaker-than-average demand as the securities headed for the worst annual performance in four years.
Fundamental policy decisions and high impact news events that may affect sentiment on December 12th
Thursday Mario Draghi speaks, whilst the Swiss publish their monetary policy intentions and assessment with the Libor rate also published, the Swiss bank head Jordan will also hold a conference, and the ECB will publish the latest monetary policy in the form of a monthly bulletin. European industrial production is expected to rise to 0.4% from the previous month’s fall of -0.5%.
In the USA core retail sales data is published, expected in at 0.2%, with retail sales up 0.6%. Unemployment claims are expected in at circa 321K after the surprise fall last week of 289K. Import prices in the USA are expected to fall to -0.7% (month on month).
Canada’s central bank governor Poloz speaks late on Thursday, whilst the business New Zealand index is published, expected to be similar to the previous month’s print of 55.7, whilst Japan’s revised industrial production is expected in at 0.5%, identical to the previous month’s print.
