Macro Morning – Fed back in play

The release of the Fed Minutes from the last meeting was not anticipated to be a market mover overnight but the fact that members thought the bond buying program may end this year spooked some investors pushing stocks lower which also drove the US dollar and US yields sharply higher.

Reuters reported,

“Several (officials) thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet,” the minutes said.

Wall Street picked up on the report’s hawkish tone, with stock prices drifting lower after the announcement, while the dollar extended gains against the euro.

Other reports we’ve seen are focussed more on the fact that traders and investors recognise that there is still more work to be done politically in the US over both the cliff and the US Debt Ceiling. This is possible of course but when we look at the price action overnight this seems more an ex-poste rationalisation than anything else.

Data-wise overnight it was pretty encouraging with Spanish unemployment falling 59,000 against an expected 50,000 gain. Spain still has a very dire employment, particularly youth unemployment, outlook with 4.85 million Spaniards out of work. But it would be nice to hope that this one off might become a trend over the course of 2013 – unless or until European unemployment starts to come down and people get back to work the Sovereign crisis will continue to simmer in the background. German unemployment rose slightly less than expected up 3000 versus the 10000 expected – but there are still 2.94 million Germans out of work.

In the US the ADP Private employment change was a much stronger than expected 215000 versus the 133000 the pundits thought they’d see in December. Jobless claims and continuing jobless claims both rose but the New York ISM for December was 54.3 versus 52.5 last.

So all in all a night where the Fed minutes combined with stronger data to give investors and traders reason to pause and think about just how long QE4 would last.

U.S. 10 Year Treasury Note, TMUBMUSD10Y Bond Quote - (TPSD) TMUBMUSD10Y, U.S. 10 Year Treasury Note Bond Price

Indeed US 10 years rose around 10 basis points which on a base of 1.80% is a huge capital loss for the holders of these bonds. Now of course it is important to remember the Fed has a specific target of 6.5% that unemployment has to fall to before it will cease the buying of bonds but it is clear in the minutes that even with that explicit target tension within the FOMC is going to be a difficult thing for Ben Bernanke to manage and the minutes are now something we all need to watch a bit closer from now on.

Watch out for non-farm payrolls tonight – a strong number could feed on the fears unearthed by the minutes and we might see a perverse reaction of equity weakness and dollar strength.

In Europe the Swiss market was the big mover playing catch up to the moves in other markets so far this week with a rally of 2.9% however the rest of Europe was more subdued and mixed. The FTSE rose 0.33%, the DAX dropped 0.29% while the CAC was off 0.34%. Madrid fell 0.40% and Milan was 0.10% higher.

In the US with 15 minutes to go markets have been sliding since the Fed minutes were released. The S&P 500 is down 4 points or .3% to 1458. The Dow is off 0.23% and the Nasdaq has fallen 0.46%.

Most of the commodities that we follow were lower overnight as the US Dollar recovered some further ground.  Crude fell 0.39% to $92.76 Bbl and it looks like we might see a further pullback on this one. Gold was 1.33% lower at $1665 and Silver fell 1.61% to $30.45 oz. Copper was also lower by more than 1%.

Lets have a look at some Meta 4 charts from my  AVATrade platform.


Looking at the chart below you can see that the break of the support level we highlighted saw a quick run to support at the old trend line that Euro broke up through in December. This line stretches back to the beginning of 2012 but is the lesser of the two trendlines on the chart as the lower line stretches back to the highs in May 2011. A break of 1.3050 (trendline and 38.2% retracement of the recent upmove) would see a deeper pullback toward 1.2980 and then 1.2875/1.2905:

eur, eurusd, euro, euro (eur) price quote


The Aussie the failed move above 1.05 again in the past few days and the strength, on a closing basis, of the trendline you can see in the chart below. Yesterday we said “The inability of the Aussie to hold back above the old down trend line and the look of the 1 and 4 hour charts suggests a consolidation/pullback today toward 1.0450/60 and if that gives way then 1.0430” So far the low overnight has been 1.0465 and even though much of this move has been in the past 4 hours ( we retain the view that the Aussie should pull back a little further yet.:

aud, audusd, australian dollar, australian dollar price quote, audusd


Twitter: Greg McKenna

Here is how the markets looked at 7.50 am this morning.

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  1. Thanks Greg…very informative.

    “Indeed US 10 years rose around 10 basis points which on a base of 1.80% is a huge capital loss for the holders of these bonds.”
    What’s really scary about that other than the ‘huge capital loss’ issue is just how skittish trading in Bonds has become.
    Instability, upon instability upon instability!

  2. This is an acknowledgement that the US economy is coming back stronger and faster than most people expected.

    I see this as a very good sign.

    • Deus Forex Machina

      That is certainly the way it might be shaping up and we can only hope that is correct I guess Peter.

      Now if some people can find jobs in the US and Europe then we might be in for some economic sunshine for a change.



    • It won’t be good for bond holders as their capital value reduces due to rises in the yield to maturity.

      Many banks and superfunds hold bonds.

      The potential need for QE to unwind over time could cause losses on bank portfolios if interest rates have increased. While they may not need to allocate capital against their bonds and might not need to mark them to market, the potential drag on earnings might keep some heat out of the market for bank shares, but this could be offset against gains in the value of real estate owned (REO).

      It would likely also put upward pressure on mortgage rates, reducing the rate of growth in demand for new as well as existing housing and consequently for demand for construction staff.

      The question is will the US Congress manage taxes and deficits and the US Fed manage interest rates to maintain steady growth in employment in the US? Like you, I think the normal answer would be yes, at least for a few years, but the Republican controlled US House concern with reducing the deficit and government debt could cause significant uncertainty from time to time, although it seems to me that the Democrat control of the Senate and Presidency means the Republicans can’t do too much damage (through too rapid fiscal consolidation) this 2 years.

      In the 2014 US Senate elections the Republicans could achieve a simple majority in the Senate as 1/3 of senators face election each 2 years. It is far less likely that they would achieve a majority (60 out of 100 seats) capable of breaking a filibuster.

      Of the 33 Senators whose terms end in 2015 (replacements elected 2014) 20 are Democrats and only 13 are Republicans, so there is possibly a much higher chance of a Republican simple majority for 2015 and 2016.

      So unless the Senate changes its rules in relation to filibusters it looks highly likely that US politics will remain bitterly contested and subject to compromise for at least the next 4 years. While this has significant implications for the rate of change in fiscal policy, the monetary policy remains in control of the Fed, the governors of which are appointed by the President, but subject to confirmation hearings by the currently Democrat controlled Senate. The makeup of the Fed changes slowly as the seven Governors are appointed for terms of 14 years. The chairman of the Fed is appointed by the President, but only from the 14 governors already on the board.

      All in all, it appears that the US government is designed for continued high stakes standoffs and that this is exacerbated by the Senate’s rules allowing filibusters. As the current Senate is finely balanced each party in the Senate would be fearful of loss of power in opposition and it is unlikely that the filibuster rules will change during the present 2 year term.

  3. Thanks for the information Greg !

    Can you help me out with a further explanation on… “Watch out for non-farm payrolls tonight – a strong number could feed on the fears unearthed by the minutes and we might see a perverse reaction of equity weakness and dollar strength.”

    Does this mean that if the Non-Farm Employment Change is +150K equity will go down and USD up ?

    Many thanks !