After impressive US Non-Farm Payroll data and Unemployment falling to 7 pct, there is certainly strong case to argue that FED should start tapering, as unemployment is only half-percentage away from 6 ½ pct target rate. Recent US economic performance goes in favor of US Central Bank’s bond purchase plan to reduce the amount.
It is evident that the labor participation is up averaging over 185.000 this year, earnings are up, and confidence in the economy has improved as consumers are looking confident. Earlier we saw sharp surge and upward revision of US GDP.
US mortgage rates are already hinting that the recovery has surely accelerated, though share market is showing unusual resilience and did not react to the tapering threat probably sensing that corporate profit will rise due to improving economic conditions. But do not be too optimistic about the share market growth as FED tapering also means withdrawal of cheap liquidity that should have adverse impact when implemented.
Friday’s reaction to the US jobs data was very unusual, as there was no positive re-action to the US unemployment data. Market chased trend by avoiding economic factor. US bond market is the best example, as 10-year bond yield after a brief surge, fell back to 2.86 pct. Allan Greenspan once warned that “when the bond market begins to move, FED might not be able to control it”.
In my view, we could soon be heading for a sharp move. What may have stopped US Dollar gain is the absence of FED official’s statement on the recent US economic pick-up. In recent past we have seen them defending tapering against jobs condition and growth, both have showed remarkable recovery.
The biggest challenge for US Central Bank is that it has to seriously consider start easing up its conventional and controversial stimulus program that is pumping USD 85 billion a month. Further delay will question FED’s credibility, as it has earlier in June declared that it may end up tapering by March 2014 based on fundamentals, which is as per projection, since unemployment has hit 7 pct and GDP is on the rise. Housing market continues to flourish.
Furthermore, all indications are that next month’s economic data will show better economic performance due to holiday season that should inflate demand. Therefore, there is no reason to further delay tapering. If FED is no rush and decides to continue its bond purchase program, then it should tell the market that why it is misguiding by deviating from its earlier (June) announcement when it is meeting its target and why is Fed unable to implement tapering. Low inflation was never its target and this could be a lame excuse.
It is very surprising that the Dovish FED officials have once again failed to read the US economic trend correctly and have been constantly trumpeting fearing economic slowdown and needs for more liquidity injection. So far estimates are FED has injected nearly USD 3 Trillion.
While, earlier on Thursday, the unexpected did not happen as ECB went for hold, but following monetary policy announcement in his press appearance ECB President Draghi answered with confidence, despite European Central Bank struggling for economic recovery and making poor future projection for the Euro-zone region.
Euro to my surprise did not weaken despite hint if slowdown in European and good economic recovery in USA. I still believe this could be false up move. If market believes that tapering and early rate hike is priced in then this is wishful thinking because once tapering is announced, no matter whatever may the size, market will become nervous and jittery. Remember this is not going to one time tapering, liquidity injection will gradually halt that has many strings attached. One hitch that may have hindered US Dollar’s rally could be the legislative factor that has deadline date for a Budget deal of December 13.
However, keep a close watch on emerging markets that should show signs of nervousness, as prior to any move its stock market will once again start melting and currencies will come under pressure and do not trust US bond market as holder of US treasuries could soon start losing its patience. More importantly, this time speeches from FED official should provide the real lead.
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