Markets Accepting the Message that Fed Tapering Will Continue

February 12, 2014

Janet Yellen’s message had two parts.  First, the onset of a rising federal funds rate remains far away and the economy remains vulnerable.  Second, a measured pace of quantitative easing will not be halted except in the case that the economy seems to be veering sharply below expectations, that is toward recession.  This message was reinforced by hawkish overnight remarks from Dallas Fed President Fisher (there’s plenty of liquidity out there) and Richmond Fed President Lacker (unlikely to see a pause in tapering).  Markets have absorbed this message in stride.

The dollar is down 0.2% against the yen and kiwi and off 0.1% versus the loonie, but the greenback has firmed 0.1% against the euro after hitting a two-week low yesterday.  It’s also risen 0.1% against the Swiss franc and is unchanged relative to the Australian dollar and Chinese yuan.

Emerging market currencies are firmer on a hard-to-believe Chinese trade report, especially the South Korean won.

Share prices in the Pacific Rim went up 1.1% in Australia, 1.0% in Taiwan, 1.5% in Hong Kong, 0.6% in Japan and Indonesia, 0.4% in India, 0.4% in New Zealand, 0.3% in China and 0.1% in South Korea and Singapore.

In Europe, stocks have climbed 0.9% in Germany, 0.6% in France and Switzerland, 0.5% in Italy, and 0.2% in Spain and Britain.

The price of WTI crude oil rose 0.6% and is again above $100 at $100.58 per barrel.  Gold settled back 0.2% to $1287.00 per ounce.

Elsewhere on the central bank watching front,

  • The Bank of England’s quarterly Inflation Report was published, and it suggests that the Bank Rate is likely to be raised initially in the second quarter of 2015, sooner than previously suggested but not as soon as unemployment dips below 7.0%.  While that element of forward guidance was not abandoned, the report says even afterward plenty of economic slack will persist, enabling the rate to stay at 0.5% the rest of 2014.  BOE officials revised projected GDP growth in 2014 to 3.4% from 2.8% and observed that the initial estimate for growth last quarter will probably get revised higher.
  • The Central Bank of Iceland retained a 6.0% 7-day collateralized interest rate, its level since the last of six rate hikes spaced between August 2011 and November 2012.  Forward guidance warns that tightening will become necessary as unutilized capacity shrinks.

China recorded a much larger-than-anticipated $31.86 billion trade surplus in January, the biggest January surplus in five years, and there was double-digit on-year growth in both exports (10.6%) and imports (10.0%).  This was the third surplus of at least $30 billion in the last four months and is inconsistent with other signs of slower economic growth.  Analysts suspect a number of distortions in the figure.

After a 9.3% increase in November, core domestic Japanese machinery orders plunged 15.7% in December, causing such to rise only 1.5% in 4Q versus increases of 6.8% in 2Q13 and 4.3% in the third quarter.  Officials at the Ministry of Economics, Trade and Industry project a further 2.9% slide in core domestic machinery orders in the first quarter of 2014.

Japanese machine tool orders were 39.6% higher than a year before in January following on-year advances of 15.4% in November and 28.1% in December.

Japanese M2 money grew 4.4% in the year to January, up from on-year increases of 4.2% in the fourth quarter, 3.6% in 2013 and 2.5% in 2012.  Broad liquidity rose 4.4% on year as well versus tiny increases of 0.1% in 2012 and 0.5% in full-2013.

Japanese consumer confidence fell to a 13-month low of 40.4 in January from 40.6 in December and a 2013 high-water mark of 46.0 in May.

Japan’s tertiary index, a gauge of service sector activity, fell 0.4% in December and posted slower growth of 0.5% in 4Q than in the prior two quarters that saw gains of 1.2% in 2Q and 1.1% in 3Q.

Euro area industrial production fell by a larger-than-forecast 0.7% in December.  That did not fully offset November’s 1.6% rise, but output also had dropped 0.2% in September and 0.7% in October.  There was a rise of only 0.3% between December 2012 and December 2013.  Between November and December, output fell by 2.6% in the Netherlands, 2.1% in Ireland, 0.9% in Italy, 0.7% in Germany, and 0.3% in France.

Swiss consumer prices slipped 0.3% in January and were just 0.1% higher than a year earlier.  The cap on the franc/euro exchange rate was imposed in September 2011 to guard against deflation. 

The French current account deficit in December of EUR 1.2 billion was 37% narrower than in November.

Although mainland GDP in Norway went up 0.6% last quarter, overall GDP including offshore oil dipped 0.2% following a 0.8% advance in the third quarter.  Exports slumped 3.2% on year.

Malaysian GDP rose 2.1% last quarter and by a greater-than-assumed 5.1% between 4Q12 and 4Q13.  On-year growth in 3Q13 had been 5.0%.  Malaysia recorded a MYR 16.2 billion current account surplus in the final 2013 quarter, 65% bigger than in the third quarter.

The U.S. January federal budget figures get reported today.  Continuing its quarterly refunding, the Treasury sells 10-year notes today and 30-year bonds tomorrow.  Wednesday sees Janet Yellen reprise her Humphrey Hawkins testimony before the senate, and the government reports Thursday on monthly retail sales and business inventories but also weekly jobless insurance claims.  But a Nor’easter winter storm sweeping up the east coast of America, which is potentially the severest weather event yet in this winter of hell, promises to suck out all the market’s attention. Weather distortions make it very difficult to know if the December-January lull in the U.S. labor market was fact or fancy.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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