The Federal Reserve’s latest caper
According to every newspaper
Is helping to drive
A stock market dive
Just when will they start the ‘Great Taper’?
Whatever you thought you knew about markets during the past months was wrong. At least that’s the way it feels as we start today’s session ahead of the employment situation report here in the US. We have seen a continued increase in the volatility of prices in every asset class, led by the ongoing Japanese equity market gyrations, but encompassing FX, commodity and bond prices as well. Why is this happening? I place the blame squarely on the shoulders of 3 men: Ben Bernanke, Mario Draghi and Haruhiko Kuroda. Each of them has been actively using verbal cues to supplement any actions their central banks have taken. And they seem to have become enamored of the idea that all they need do is say something and markets will respond as desired. It was Aesop who taught us about the boy who cried wolf, however, and I fear that these three are starting to learn that lesson; that it’s not good enough to simply promise something.
Yesterday, the ECB did nothing. Talk of negative rates was pooh-poohed; talk of purchasing ABS was deemed theoretical; and markets have realized that Draghi no longer has the full support of the ECB to do whatever he chooses. His comments going forward have been devalued and thus “doing whatever it takes” will now require concrete actions rather than grandiose ideas that are never implemented. Counterintuitively, the euro rallied a bit on this news as despite Draghi’s ineffectiveness, it was actually deemed as a hawkish outcome supporting the currency. This morning, the European data was better than expected with both German Trade data and IP beating expectations and French Trade data released as expected. The euro is little changed from yesterday’s close as the market awaits this morning’s US payroll data.
In Japan, the pressure is increasing on Kuroda-san as much of what his policies had achieved continues to be unwound. Here too, we see a situation where central bank actions have underperformed the expectations that were built up by comments from the central bankers. There is now a clear split within the BOJ over the idea of incremental policy movements, with a number of members pushing against the idea of doing small things as being too reminiscent of past failures. They want only big, bold actions. This is preventing the BOJ from doing anything right now, and that seems to have undermined both the weak yen story and the Japanese growth story. Thus, the Nikkei has given up 17.6% since its peak three weeks ago, and the yen has recovered almost 8% from that same point. Since USDJPY broke above 80 for the first time in late October, this is the most significant correction we have seen, and was probably long overdue. Is this the end of the yen weakness story? Absolutely not! In fact, I believe that this should be seen as an excellent opportunity for receivables hedgers to add to their hedges. Remember, the BOJ is still going to double the money supply over time, it just takes time to actually do it. My thought is that until the Upper House election occurs on July 21, this consolidation will continue, and perhaps even run further to reach key support at 93.50. But the weak yen story is not over, simply on hold.
Lastly, that brings us to the US and Berdudlen, the trio overseeing Fed policy right now. I must have read 15 articles in the past week about how and how much the Fed will ‘taper’ its current asset purchase plan and what impacts it will have. A Bloomberg survey released overnight has economists looking for tapering to begin anywhere from the July meeting until late 2014 with no consensus at all. More frighteningly, Berdudlen seems to have either no idea or no concern as to how markets will respond when it eventually does occur. (I think it’s the former but I fear it’s the latter.) There are two things which I think are certain, though. At some point the Fed will slow down and stop its asset purchases, whether gradually or with a great deal of fanfare, and bond yields will rise before that happens as the market will have anticipated the move. As long as the US economy does not slip back into recession, the taper will be USD positive. In fact, I think it could be very significantly so. The USD will go from a funding currency to an investment currency and positioning will need to reverse completely. That means a lot of dollars will be bought on the FX markets. While the timing of this remains completely in the dark, it is a virtual certainty to occur at some point.
And not to forget the data today, it’s payroll day.
Here are today’s forecasts:
|Avg Hourly Earnings||
The non-farm forecast has fallen since the weak ADP number, and all eyes will be on the participation rate as well, although there is no forecast for that. Certainly a strong number will accelerate Taper talk, but I fear we are looking at another lost summer of economic malaise in the US. Housing is the only thing that remains relatively robust. (Well, that and inflation!) Look for 125K and further slight weakness in the dollar.
Good luck and good weekend