A weak commitment from the Fed

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There was no great surprise last night with the Fed’s decision to start publishing forecasts for the policy rate.  This will be included in the regular summary of economic projections from the board members, the next one due at the end of this month. 

The Fed has already made a commitment to keeping rates steady until the middle of next year.  The expectation is that the forecasts could enhance this even further, by signalling steady rates until at least the early part of 2014.

But the gains from this in terms of the economic and improved financial conditions are likely to be marginal at best.  We’ve had some better economic data of late, the latest being yesterday’s firmer manufacturing ISM data in the US, but we remain on a long road to balance sheet recovery.  It’s still more likely than not that the Fed will be pushed into more quantitative easing later in the year.

Guest post by FxPro

Commentary

Aussie on the up. That wobble in the Aussie which resulted in a sharp drop to below parity in the middle of last month has been rapidly forgotten. Yesterday, the AUD traded at 1.03, a three week high. We’ve seen some pull-back in overnight trading and it must be said that this better tone to the Aussie could struggle to hold in the face of further negative headlines around Europe and the continued pressure on China.  Furthermore, there were more overnight comments from Premier Wan warning of the tough conditions that are likely to prevail in the early part of this year. Once again, the Aussie could have a stormy relationship with the parity level.

The mountain of maturing debt.   Justifiably cautious and less willing to take on risk, the enormous debt refinancing task of the world’s major sovereigns this year looms like Mount Everest for investors and traders alike. The numbers involved are truly enormous. According to Bloomberg, the maturing debt of the world’s major sovereigns alone will be USD7.6 trln in 2012, more than one-half the size of the US economy. Add-in interest payments on the outstanding debt and the total climbs above USD 8 trln. The refunding task of both Japan and the United States is around USD 3 trln each, followed by Italy (USD 500bn including interest payments) and Franc e (USD 367 bn). It remains to be seen how the forces of (large) supply interact with the (limited) forces of demand this year. In the US for instance, notwithstanding the huge refinancing task, demand for treasury paper last year was the strongest for nearly twenty years. However, for the troubled sovereigns of Europe, demand was the weakest for more than a decade.  Many strategists believe that bond yields in the major markets will rise appreciably this year. In our view, this would be very surprising. In 2011, the most effective safe haven was core government bonds in the US, Japan, Germany and the UK. If investors remain firmly fixated on wealth preservation, then surely core government bonds will again attract huge demand, while the bonds of fiscal miscreants will suffer once more.

The search for good news.  The usual search for optimism at the start of the year has at least met with some success. In Asia, the latest non-manufacturing PMI data in China was better than expected, rising back above the 50 level (to 56.0), but as usual this should be taken with some caution, with the data showing strong seasonal distortions. More encouraging and reliable was the manufacturing data released on new year’s day, which showed a nudge back above the 50.0. In the UK, the manufacturing series showed a move higher to 49.6, the third consecutive sub-50 reading.  Those who were away last week will also have missed the latest run of better data out of the US, the most notable being the surge in consumer confidence recorded for December. The headline reading, at 64.5, was the highest for 8 months, with the job market improvement playing a part in this. The difference between those finding jobs plentiful and hard to get improved for the third consecutive month, having been as low as -43.8 in September, now standing at -35.1. This shows a fairly decent inverse correlation with the unemployment rate, although tends to be more coincident (so reflecting actual labour market data) rather than leading (suggesting better data ahead). Nevertheless, it does serve to illustrate the important role the labour market is playing, even more so in this Presidential election year.

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