Macro Morning: No taper in sight


Tonight is a big night for stocks and markets more broadly because when Bernanke speaks he is likely to get a reaction. The reason I say that is because I have no doubt that the entire stock market rally is related to the Fed’s QE operations and as such if there is a sign that the “taper” is coming then it seems likely that stocks might swoon.

But what he is going to say is less clear than we may think because the battle continues to rage inside the Fed as to the appropriate course of action. As a sop to the hawks the Fed has announced it will change tack when unemployment hits 6.5% but they still seem to want a quicker end to this most unconventional of monetary policy and we have all learnt a new word “taper” over the past few weeks. Last week Dallas Fed boss Richard Fisher was all for the taper but last night Governors Bullard and Dudley were less aggressive in their words as Reuters has reported:

St. Louis Federal Reserve Bank President James Bullard told an event in Frankfurt the Fed should continue quantitative easing, adjusting the pace of bond buying according to incoming data, and said U.S. inflation has recently been below target.

New York Fed President William Dudley said the economy’s ability to weather lower government spending and higher taxes in the coming months will be key to the Fed’s decision on whether to reduce bond purchases. Both are voting members of the Fed’s policy-setting committee.

One in favour of more easing and one neutral but a clear indication that the Fed is split and if that is the case it is less than more likely that Bernanke is going to give any type of explicit signal tonight. Whatever he says it is going to be market moving particularly for stocks the correlation between the Fed’s balance sheet growth and the stock rally is very high at the moment and periods of no buying of bonds have, over the past few years been related to stock prices falling:

QE is driving the stock market rally

No QE = no stock rally whatever else the rhetoric out there at the moment.

Looking briefly at stocks overnight in relation to this chart then it is no surprise that prices rose. The Dow finished at 15,388 up 0.34%, the S&P 500 rose 3 to 1,669 up 0.16% and the Nasdaq was 0.16% higher also. In Europe the FTSE’s stellar run continued with a rise of 0.72% which may be connected to the low inflation data which knocked the Pound for six back toward 1.51. On the continent the DAX was up 0.19%, the CAC rose 0.33% yet Spanish and Italian stocks were down again falling 0.59% and 0.46%.

On FX markets, the dovish talk from the Fed knocked the US dollar from highs against the euro and yen and it is trading at 1.2907 and 102.49 respectively this morning. Against the CAD it is likewise lower from the high of 1.0321 trading at 1.0266 this morning. The Aussie had an almost 100 point range trading down to 0.9749 and a high of 0.9842 and it sits at 0.9806 roughly where it is at the moment.

Looking specifically at the Aussie dollar, it is clear that for the umpteenth year in a row the risks to the Australian Treasury’s growth and revenue forecasts in the Federal Budget are high once more. The Budget’s  Panglossian outlook was highlighted in a speech by Treasury Secretary Martin Parkinson who said  the risks were still to the downside from a potential further Terms of trade deterioration. You can find a recap of the speech by Leith here.

But what this highlights from where we sit and as Leith argues is the idea Australia is heading back to 5% nominal growth sometime soon is ludicrous which will put further negativity into the already deteriorating sentiment for the Aussie. But the RBA minutes yesterday didn’t really feed that negativity giving a very balanced view of things suggesting that the high Aussie was in the forecasts and that it was inflation, or lack thereof, that allowed them to cut.

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

At the moment the Aussie is clearly trying to base but so far has been unable to regain the bottom of the trend line it broke down through last week. Traders who have a selling axe to grind are clearly watching this level which comes in around 0.9862 today. A break of this is now necessary to kick the Aussie higher. We expect it to at least try to get there in the next day or so.

On commodity markets gold and silver were both off about 0.50% as was copper and Nymex crude. Corn fell 1.73%, wheat was 0.69% lower but soybeans rose 0.85%.


Westpac Consumer confidence in Australia today and it will interesting if the dichotomy between consumers and business continues.

The BoJ is out later today and then the EU current account and British retail sales and BoE minutes will be released. In the US its Bernanke’s testimony, FOMC minutes and Existing home sales.

Twitter: Greg McKenna

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  1. QE is the hotel California. I suspect QE continues but bond yields go UP. Economy takes a hit. Sharemarket rises but corrects when profits disappoint.