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The Marketplace - October 29th 2014
29/10/2014
The US Federal Reserve is expected to end its bond-buying program this evening, closing one controversial chapter in its crisis response even as it struggles to manage a full return to normal monetary policy.
The Fed is likely to announce at the end of a two-day meeting that it will no longer add to its holdings of Treasury bonds and mortgage-backed securities, halting the final $15 billion in monthly purchases under a program that at its peak pumped $85 billion a month into the financial system. The statement the Fed will issue this evening will be read carefully for signs of how weak inflation, ebbing global growth and recent financial market volatility have influenced US policymakers.
Bank of England Deputy Calls for Interest Rate Hike Patience
Bank of England Deputy Governor Jon Cunliffe said slowing inflation and a bleaker outlook for the economy justify keeping emergency stimulus for longer. “We’ve now seen evidence of a slowing in UK growth, and prospects for the global economy have deteriorated,” Cunliffe said in a speech late yesterday in Cambridge, England. “The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought.”
Cunliffe’s comments echo those of BOE Chief Economist Andy Haldane, who said last week he’s become “gloomier” about the economic outlook. They are among a majority of policy makers who want to keep the benchmark interest rate at a record-low 0.5%, and minutes of the BOE’s October meeting showed they hardened their position because of increased threats to the recovery from the Eurozone.
US Consumer Confidence up As Durable Goods Orders Disappoint
The US dollar was down against most major currency counterparts on Tuesday as a key indicator of production showed that orders for durable goods fell 1.3 percent month-on-month in September, the largest drop in 8 months, much lower than market expectations of an increase of 0.6%. The unexpected drop in September is attributed to a decrease in non-defence new orders for capital goods (excluding aircraft), which fell by 1.7%. Transportation orders dropped 3.7 percent and automobile orders fell 0.1 in September.
US Consumer confidence also posted unexpected results on Tuesday, spiking to a seven-year high this month to 94.5 in October, well above forecasts of 87.0. Consumers seem to have regained confidence in the short-term outlook for the economy in light of the current job market and business conditions.
Mixed Eurozone Data Clouds Recovery Prospects
German Import Prices rose month on month in October from September by 0.3%.The data release proved positive for the Euro as it made gains particularly against the US Dollar gaining half a cent by the time trading closed. The rest of the day was quiet from the Eurozone but the markets seem to be digesting the results of the ECB Stress Test Results from the weekend. 25 banks failed the test but if they were under full capital rules, as many as 36 could have also failed.
The central bank in Frankfurt suggested there was a 25 billion-euro shortfall for the region’s lenders with 11 banks needing more capital to cover the deficit. Italy’s main bank, Monte Paschi has the largest deficit at 2.1 billion Euros although the Italians contribute to 12 billion of the total deficit, almost half of the Eurozone as a whole. Greece will have to revalue 7.6 billion Euros of their loans outstanding, with German banks at 6.7 billion Euros.
The ECB’s health check showed banks in President Mario Draghi’s home country of Italy are in particular need of more funds as they cope with bad loans and the nation’s third recession since 2008. Monte Paschi, Italy’s third-biggest bank, Banca Carige and two other smaller cooperative lenders have a combined 3.3 billion-euro gap that must be replenished because the measures taken this year weren’t sufficient, according to various ECB reports.
Today’s Key Data:
USD – FOMC Statement: The Fed is expected to remove the doubts and end QE as planned. However, the “considerable time” guidance regarding low rates is expected to stay in the statement. Bullard surprised markets by suggesting that QE could continue. However, there are reasons to believe that QE will end: FOMC doves support the end of QE, all employment data (NFP, JOLTS, jobless claims) look great and inflation is Okay. In addition, changing course on a stock market slide could erode the Fed’s credibility. The genuine worries about global growth is likely to result in leaving the “considerable time” phrase. This is likely to change when the global outlook improves, and when the decision is accompanied by a press conference.
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