Stocks gain on Fed’s lack of clarity

Last Thursday’s Federal Open Market Committee (FOMC) rate decision seemed to be good on U.S. equity markets and asset markets in General. The NASDAQ Composite Index added 0.7% to its value following the announcement and the Dow Jones added 0.6%. This is somewhat surprising given the announcement of an expected, yet non-trivial, 10 billion dollars reduction of the Fed’s asset purchase program. Further digging into press release accompanying the decision, one would note that the Fed is quite content with growth in economic activity, saying it had rebounded in recent months, and that business fixed investment, which is considered pro-cyclical, has resumed its advance. So one has to wonder, if the economic data is suggesting a more hawkish monetary policy, why are equity markets gaining? QE3's tapering had been quite consistent since it started in December of 2013. In that sense, last week's 10 billion addition was not a surprise. That leaves us with the future path of the Federal funds rate. Regarding this, there is the fact that the announcement saw the Fed’s longer term rate projection sliced from 4% to 3.75%. Regarding rate expectations, last week's announcement had very dull content. Investors could have been concerned of Yellen following BoE Governor Carney’s path, by suggesting that a rate hike could occur sooner than markets currently price. Additionally, Yellen's comment from March, that the gap between the end of QE3 and the Fed raising rates should amount to about six months, was still her most recent guidance. Regarding financial stability, the recent month's rally in equity markets, amid historically high valuations, is another reason to question the current monetary policy. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Economic events of this week

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Monday: The Final estimate of the Eurozone’s Consumer Price Index will be released. Analysts expect for it to remain at a moderate annual 0.5%. In the U.S., the Empire Manufacturing survey and May’s Industrial Production data will be released. Tuesday: May’s Consumer and Producer Price Indices are scheduled for release in the U.K. The ZEW survey will be released in Germany. In the U.S., May’s Consumer Price Index, as well as Housing Starts and Building Permits data will be published. Wednesday: Japan will publish May’s Trade Balance data, where analyst consensus sees the deficit widening to over a trillion Yen. The U.S. is due to host the weekly MBA Mortgage Applications. The day will also see the all-important FOMC rate decision published – analysts expect the FOMC to order QE3 tapered by another 10 billion dollars, setting it at a monthly 35 billion. Thursday: April’s All Industry Activity Index will be published in Japan. May’s Retail Sales data will be released in the U.K. In the U.S., both the weekly Initial Jobless Claims, as well as May’s Leading Index will be published. Friday: Advance figures of June’s Consumer Confidence will be released in the Eurozone.

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Tapering, unguided

The Federal Reserve got itself into a cumbersome situation in recent months as it tried to establish an alternative monetary policy to that outlined in Ben Bernanke’s term. The release of the Federal Reserve’s April minutes last week presented a good opportunity to skim over its rough edges. The Fed has an incentive to continue tapering its asset purchase program. At 4.3 trillion dollars, the Fed’s Balance Sheet is more than five times larger than it were a decade ago. On the other hand, at currently 45 billion dollars a month, reducing asset purchases by 10 billion dollars can only continue for a limited amount of time – four Fed decisions to be exact. The Fed knows that once QE is off the table, it will need to address its future monetary policy. Providing any indication now as to what that might be has an increasingly larger effect on the markets. With the above a given, it is clear why April’s minutes, released on Thursday, had the incentive to convey a message of continued tapering. The usual review of the Fed’s take on the U.S. economy was provided at the minutes. Namely, it was mentioned that most of the meeting’s participants expected to see inflation returning to 2% within the next few years. Downside risks to growth were also said to have been found at the housing sector. A number of participants even expressed concerns that a persistent slowdown in housing could pose a risk to economic growth. Promises as to the day after QE3 ends were, however, avoided.

On both sides of the Atlantic

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Wednesday sported an opportunity for U.S. data to shake the markets. Initially, the ADP employment change was released, and presented a very impressive increase of 215,000 jobs in the U.S. economy during November. When the promising data started advocating the tapering of QE3, it also sent the USD to strengthen nearly 0.5% versus the EUR. However, the day did not stop there, as the ISM Non-Manufacturing Composite Index was released shortly after, with less appeasing results. The negative 53.9 figure dispersed some of the QE3 tapering concerns, weakening the USD back to the 1.36 levels versus the EUR, where it started at. Equity reiterated their example for the “Bad news is good for stocks” paradigm, as the S&P500 gained approximately 0.7%.

Thursday saw a rather expected decision by the Bank of England to keep the official bank rate at 0.5%. The day’s protagonist, on the other hand, is probably the Department of Labor’s Initial Jobless Claims report, which indicated only 298,000 Initial Claims were submitted during the previous week. The last time this occurred was September and the figure has since surged to as high as 737,000, due to the Government’s shutdown. However, it seems that optimism regarding the labor data was already priced in the markets, as a result of the previous day’s positive ADP figure. Evidently, markets saw little change following the print.

Friday was somewhat of a different story. The day started with very positive indications regarding the U.S. labor market. These included U.S. Nonfarm Payrolls adding 203,000 Jobs in November, and perhaps more importantly U.S. Unemployment dropping to a level of 7.0%. Stock derivatives’ immediate response was to lose about 0.5%. Taper-induced trading was also evident in gold which took quite a blow and of course the USD which strengthened by almost 0.3% versus the EUR. Interestingly, things did not stop there - when the official trading started market opening was on average a tad higher than the previous day’s close. However, soon after that euphoria spread around equity markets, which lead both the Dow and S&P 500 to close their trading days more than a percentage point higher than the previous day’s close. 

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