The Fed remains divided over monetary stimulus

Indifferent data overnight has done little to quell the divided talk from the Fed about the way it is likely to deal with monetary stimulus over the coming year.

The dual-mandate of lowing unemployment to around 6.5% and increasing inflation to 2% to 3% looks like being either ignored or overhyped by the new composition of the FOMC. Newly-installed voting members Charles Plosser, Richard Fisher and Jerome Powell are all hawkish on monetary stimulus and all three continue to talk up the quickening of the unwinding of the monetary program.

Richard Fisher is an interesting member; he is seen as hawkish, yet in reality he is dovish on many fronts. He believes employment is too high and that 6.5% maybe still be too high. He also believes inflation is too low and that the underlying economy is still in a very fragile state, but thinks the method on which it has been supported is a risk event in itself and that the ballooning Fed balance sheet places even more risk on the country.

Philly Fed President Charles Plosser has an even stronger view than Fisher, and overnight the newly-installed voting member openly expressed his opinion that monetary stimulus should be completely unwound by mid-year, even if unemployment is still above 6.5% and inflation remains stubbornly low. He remains a critic of Fed communication and the 17-month program on the whole as it has be unable to achieve its goals and has left no room for error.

The key line from is speech was this: "The longer we continue purchases in such an environment, the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation."

With Stanley Fischer the likely candidate for Vice Chairman, Fisher and Plosser may find a slight ally as Fischer too has expressed a desire to unwind monetary stimulus and his position may have some sway in what still remains a dovish voting board. That said, it is unlikely that any major move outside the current $10 billion unwind is likely.

However, the communication is leading to further weakness in USD and US equity markets as general sentiment slides. The feeling is that a healthy correction is on the cards and this looks likely as even a better-than-expected US earnings season has not been able to improve investment sentiment.

78% of companies that have reported so far have beaten on the earnings line; the historical average is 71% and consumer sentiment remains positive, yet the market cannot push higher. The US hasn’t experienced a proper 10% correction since May 2012, and with Dow futures reversing quickly on the close in the US, there is negative sentiment heading into the US trade balance figures, unemployment figures and non-farm payrolls. Any weakness here will just amplify the current downward trend.

Ahead of the Australian open                                                                                                                        

With China still closed for Chinese Luna New Year, local data will be fundamental to trade today, particularly the trade balance figures. Australia has seen its current account narrowing very quickly lately as export of materials hit record highs.

I would expect to see iron ore, copper and oil products following the previous month’s trend of jumping to record levels, despite the falling spot prices. The AUD may find a 9 handle in front of it by the weekend if trade balance is better than expected and non-farm numbers are weaker.  

Currently we are calling the market up 11 points on the 10am bell (AEDT) to 5081, +0.21%; however this may reverse on the trade balance data and the weakening US futures read. Although last night was  relatively quiet, the next 48 hours will be interesting as global macro data drops. Watch for perception positioning throughout the day.

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