Markets are thin as the world waits to see if Chairman Ben Bernanke’s last act at the Fed will be to start the reduction in his unprecedented quantitative easing program. Traders are split almost evenly between picking December, January or March as the start of the taper, but the Asian markets overnight seemed to think it isn’t going to happen today. That actually may be the safe bet, as its doubtful that Bernanke would announce a stimulus cut on his way out the door, leaving Yellen to handle the fallout.
There are a number of voices that note that the Fed keeps finding reasons to keep purchasing bonds and mortgage-backed securities from the big banks, and are just using the threat of tapering to influence the markets. Even some Fed branch presidents are noting that the almost $4 trillion spent on buying bonds has had little to no effect outside of Wall St.
Some analysts believe that the Fed is enticing the big banks to not lend the cash they’ve been given, by keeping the excess funds rate so attractive. The banks sell bonds to the Fed, then earn interest from the Fed on the money gained. If this money was released into the “real” economy, inflation would be closer to the 2% the Fed says it wants, and would remove one reason for continued QE.
Another piece of data going into the “taper” column this morning is housing starts in the U.S., which hit the highest level in over 5 years. One-third of those starts were for multi-family homes, as the rental market grows. The partial budget deal crafted by the bipartisan super-committee and passed by the House is seeing resistance from both sides in the Senate. While reducing the “sequester cuts” in half, the deal ignores social security, lets unemployment benefits expire, and cuts military pensions for veterans under the age of 62 – developments which are making Senators up for re-election very uncomfortable.
In Europe, the economy in the UK keeps getting better, as unemployment hits a 4.5-year low of 7.4%. Analysts had expected it to remain at 7.6%. Since the Bank of England said that rates would not be raised until unemployment was under 7%, the better than expected numbers may mean this happens earlier than the projected 2016 timeline. Germany is also posting more upbeat economic data, as the Ifo business climate index rose to 109.5 from 109.3. This helped euro stocks into the green
In Asia, the falling yen and expectations that the Fed will stand pat on QE levels helped the Nikkei and the Hang Seng post gains.
The dollar pulled into a nice rally in early morning trading, breaking a 3-day slump, but dropped back down to oscillate around the unchanged level.
Gold and silver are near unchanged, while platinum and palladium saw the second late-morning sell-off in a row, this time slightly before yesterday’s sharp decline.
Expect volatility today in all markets, once the official FOMC statement is released at 2pm Eastern Time, and probably more gyrations after Bernanke’s last press conference later that afternoon.