Key parts of the statement:
Language around economic activity was practically identical to the July statement. Janet Yellen’s key phrase of ‘improved somewhat further’ was used to explain that labour conditions remain, as does her concern that there is still significant slack in unemployment.
Interestingly the street talk of ‘inflation risk’ that had driven the market to believe ‘considerable time’ would be removed was not in the Fed’s thinking at all. In fact, the FOMC has actually downgraded language somewhat to ‘inflation has been running below the committee’s goals’ from ‘inflation moved somewhat closer to target’.
There was no move on the forward guidance, indicating that the Fed funds target range is likely to hold the line ‘for a considerable time after the asset purchase programme ends’. In saying that, a further US$10 billion came out of the asset purchase programme, with US$15 billion remaining and due to be completely unwound come October. The statement did indicate that this would be the case and therefore a considerable time will begin from October 31.
Economic projections were tweeted that the unemployment rate will move down to 5.95% in Q4 of 2014 with Q4 2015 estimates putting the unemployment rate at 5.5% - also lowered. Real GDP growth is estimated to slow to 2.1% in 2014, with 2015 estimates lower to 2.8%, but unchanged in 2016 at 2.75% - a mixed message considering the street’s view on growth.
Finally the meaning of the dots in the summary projections was clarified; they are designed to indicate the mid-point of the Fed funds rate projections. Most have moved up modestly and it should be noted that two FOMC participants believe the first rate hike should be 2016, but there is a clear expectation that rates will rise. The medium dot for 2014 was unchanged as one would expect, however the end of 2015 rose 25 basis points to 1.375%, with the end of 2016 rising to 37.5 basis points to 2.875% and the end of 2017 projection being 3.75%, which is an interesting shift.
A very muddled picture has been created from the language in the statement. Growth has lowered, the unemployment rate is improving, inflation is stagnating and rates are rising; it is the final point the currency and bond market has latched on. The dots imply solid rate hikes in 2015 and 2016. The current Fed funds rate is less than 0.25% to reach 1.375% by December next year; the Fed will have to raise rates by more than 112 basis points.
And that move isn’t going to start before the New Year, as 2014 estimates are unchanged, meaning we could see five solid rate hikes in 2015 to reach the dot’s estimate. It would mean 2016 would need six further rate hikes of 25 basis points or more to reach the mid-point estimate.
USD bulls must be jumping for joy at the implied suggestion in the statement; the USD investment case is only strengthening on the data from overnight.
Ahead of the Australian open
We’re currently calling the ASX 200 flat (off two points) to 5405. Trade yesterday saw several very interesting technical breaks. The 2012 uptrend was clearly broken; the daily volume through the market was 29% above the 30-day average; the RSIs are well below 30 and the stochastic is also well into oversold territory. Interestingly, every time the RSI has crossed the 30 line since June 2010 the ASX has bounced back almost immediately.
What was also interesting from yesterday’s trade was the punishment the banks took. There were plenty of theories about why the banks were savaged; the heat in the housing market (single day volumes were almost double that of the 30-day which is an issue longer term, but unlikely to be the main reason for yesterday’s move), the yield trade ending and the squeeze in the carry trade.
The last two would explain the volume of trade in the banks; total returns for international institutional investors are being squeezed, with the AUD falling 4.5 cents in two weeks and the fact the US bond market is becoming appealing to yield hunters, the equities yield trade looks to be ending somewhat. International investors are not entitled to franking credits, which diminishes the yield return even more, and the shedding of positions from international investors looks to have started.
Again I would site the RSIs in the banks which are indicating they are heavily oversold; if the ASX is going to bounce, the four banks which make up 23% of the ASX on a weighted basis is a starting point, a short-term bounce is highly likely, medium term however the jury is out.