He is the first Fed member that has actively pointed to the gains made in the labour market as a reason to taper. There is no doubt the US is experiencing an acceleration in hiring, a lowering of unemployment claims and has now registered an unemployment rate that hasn’t been seen in five years.
This is very positive from a macro perspective as ‘full employment’ is a sign of productivity; increased employment levels do tend to front run business productivity and suggest that 2014 and 2015 could be much rosier years than the previous five.
The line that I find interesting is:
‘A small taper might recognise labour-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014.’
That to me signals that when taper does happen it will be a token of faith to the markets. The September meeting has certainly broken the trust of the markets and the level of criticism aimed at the FOMC’s communication is amplified. This time around, the data is lining up once more and positions that are built into markets are around employment expectations; if the Fed does not act in the next three meetings, all trust within the market will be gone.
However, I believe that any moves in the asset purchase program will be a token affair as its second mandate of inflation is still well behind expectations.
US inflation is still half what it should be and remains stubbornly flat at 1.1%, which is why Bullard followed up his earlier comment with this line:
‘Should inflation not return toward target, the committee could pause tapering at subsequent meetings.’
This does allude to the fact that the Fed has communicated one thing very clearly and that is unwinding monetary stimulus is not tightening; the record low interest rates from the Fed are here to stay and if the unwinding of the bond purchases program causes any issues, it is ready to push the button once more.
His speech I believe should be seen as a positive for markets. It is conformation that good data prints can be taken as good news. We need to see that employment and business growth is translating into increased profitability, as firms, companies and consumers start to release the purse strings. If the Fed starts to recognise this change as well this will be confirmation that forecasts are likely to beat estimates and the P/E expansion of the past 12 months is justified.
Ahead of the Australian open
Today is all about Asian data and whether the ASX will react positively to it. Japan is releasing its manufacturing index and tertiary industry activity. Australia is releasing its business confidence and home loans figures which is followed by the biggest mover of the region - China’s industrial production numbers, fixed asset investment change and retail sales.
The ASX has been blowing in the wind over the past two weeks and this can be put down to corrections in NAB, ANZ and WBC. All have lost over 10% since their highs in October (yes they have turned ex-dividend, however they have wiped off over 100 points from the market in that time). If the ASX is to turn around its fortunes, the banks need to stem the bleeding and this change may begin on Thursday when the first set of dividend payments are returned to shareholders.
The fact the ASX is behaving independently of the US, Japan and China is a concern as it suggest international and local investors are questioning company and country fundamentals rather than following global trends; on current trading behaviour the fundamentals are not stacking up.
Ahead of the open, the ASX 200 looks like continuing on its own trajectory, shifting lower still with the cash index pointing down three points to 5141. BHP’s ADR is also suggesting the miner will buck the index’s trend by adding 20 cents $36.97, as iron ore heads back towards US$140 a tonne. However it’s the reactions to QBE and the banks that will be the key to ASX trading today.