The Overnight Report: December Tapering Not Dismissed

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow fell 61 points or 0.4% while the S&P lost 0.5% to 1763 and the Nasdaq dropped 0.2%.

If Wall Street was looking for a more definitive tapering timetable from the Fed last night, post the government shutdown, it was disappointed. Indeed, if anything, talk of tapering not being even thought about until March or maybe June has now been tempered by the release of the FOMC statement.

The government shutdown has had a major impact on the US economy and on consumer and business confidence, and that impact is expected to become apparent in economic data releases going forward. Of particular interest will be the December quarter GDP. Yet those pouring over last night’s statement struggled to find anything much different to what was said in September, pre-shutdown. Fiscal influence has not featured in monetary rhetoric, despite Bernanke being hailed as a seer for deciding not to commence tapering in September as expected when Congressional debt negotiations were pending. Mention was made of “the extent of federal fiscal retrenchment over the past year”, but this is a reference to the earlier sequester and appeared in the September statement.

Instead, the Fed left its US$85bn bond purchase plan intact, as assumed, and again cited a “too weak” economy as the reason. Despite conditions being too weak to justify tapering, the US economy continues to grow at a “moderate” pace, the central bank suggested.

All very similar to September, pre-shutdown, until something suddenly became glaringly obvious. The clue was not in what was in the statement, but what was not in the statement. Last month the Fed had referenced “tightening of financial conditions” as a secondary reason not to taper, referring to the big jump in US bond yields, and subsequently mortgage rates, from the first tapering hint in May. This month that reference is gone. Yet if we use the ten-year yield as the benchmark, it jumped from 1.6% in May to almost 3% in September but has only fallen back as far as 2.5% since. Thus financial conditions remain “tighter”, yet the Fed has removed the reference as a reason not to taper yet.

Omigod, said Wall Street, we could still be hit with tapering at the December meeting.

On that note, the Dow dropped 100 points, having gone nowhere up to the 2pm release. Given Wall Street has traded at new all-time highs, and the Dow actually achieved that feat only the night before, a pullback is hardly a surprise. But the buyers still filtered back towards the death as everyone had a little think about it.

Many on Wall Street had decided the economic data leading into the September meeting were simply not robust enough to justify tapering, despite the market’s conclusion that it was a done deal, and they were correct. A tapering decision, the Fed has implied, is “data dependent”. The data from here can surely only get worse as the shutdown impact rolls through. And while it has never been specifically stated, Wall Street has assumed Bernanke looked ahead in September to the Congressional debt debate and saw danger, before deciding it prudent to hold off on a significant monetary policy shift. Well they’ll be back at it again in January and February, so why would the Fed not adopt a prudent approach once more?

Just to complicate the whole issue, the December FOMC meeting, and subsequent press conference, will be Bernanke’s last. After all that Bernanke and America have been through together during his tenure, that press conference is more likely to be one of bouquets, gold watches and “three cheers”, rather than “I’d like to leave you with this little monetary policy bombshell” and a hospital pass to Janet Yellen. Yellen, as it has been well established, is even more dovish than Bernanke.

So realistically, December tapering looks rather unlikely.

So where are we left? Nowhere much different really. The US stock market didn’t post any significant reaction and other markets were similarly unmoved. The US ten-year yield rose 2bps to 2.52%. The US dollar index rose 0.2% to 79.77. Gold fell US$1.20 to US$1345.10/oz.

On the subject of US economic data, last night’s ADP private sector employment report showed a six month low 145,000 jobs added, missing 150,000 forecasts. The September headline CPI rose 0.2% and the core 0.1% as expected. US annual inflation is running at a mere 1.5%.

Base metals closed before the release of the Fed statement, but on expectation of no sudden tapering they rose slightly, with copper up 1%. The oils are still doing their own thing, with the ongoing Libyan disruption helping Brent up US$1.17 to US$110.00/bbl and higher than expected weekly US inventories helping West Texas down US$1.43 to US$96.77/bbl.

Spot iron ore has no interest in the Fed and fell US10c to US$131.20/t.

The Aussie is down 0.1% to US$0.9468 and the SPI Overnight fell 15 points or 0.3%.

The Bank of Japan will hold a policy meeting today, but no bombshells are expected from that one either. In Australia, building approval and private sector credit data are due.

On the local stock front, National Bank ((NAB)) and BT Investment Management ((BTT)) will post full-year results while Henderson Group ((HGG)) will provide a quarterly update, Woolworths ((WOW)) will deliver quarterly sales data.

Rudi will appear on Sky Business from noon.
 

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