Predictably US markets didn’t like the news that the Fed sees the American economy continuing to improve to the point where it was able to cut another $US10 billion from its quantitative easing program.
That’s despite the clear implication that the Fed remains comfortable with the health of the US economy and employment levels, which it sees improving again in 2014.
And just as predictably, neither did traders in our market with the share price futures contract showing a fall of around 60 points at the start this morning.
The Dow, which was down 137 points ahead of the release of the Fed’s statement at 6 am Sydney time, fell further immediately, extending the dip to around 200 points, before rising for a while, and then falling away again in late trading. It was a similar story for the S&P 500 and the Nasdaq.
Gold rose $US17 an ounce to around $US1,267 an ounce, oil dipped a few cents a barrel in New York, the Aussie dollar slid back towards 87 US cents after hitting 88.25 cents during the day and the US dollar rose as 10 year treasury bond yield fell under 2.70%.
Nervy investors clearly didn’t like the fact that the Fed shrugged off the emerging markets turmoil of the past 10 days to two weeks and went ahead and cut its spending on bonds and mortgage securities. That was not what the sugar addicts in the markets wanted to see, but the move was justified by the undoubted improvement in the health of the US economy.
In fact the emerging markets turmoil didn’t rate a mention at all.
Data out tonight, our time, will add further confirmation with the first quarter GDP growth estimate likely to come in around annual rate of 3% or more, much stronger than forecast last month.
While it will be slower than the 4.1% annual rate seen in the third quarter, it will confirm the economy has "picked up in recent quarters" as the Fed said in its post-meeting statement this morning.
The Fed decision to again cut the level of quantitative spending was unanimous in what was the last meeting of the Federal Open Markets Committee for outgoing chairman, Ben Bernanke.
The Fed’s post meeting statement seems to have caught some analysts by surprise with its mild optimism where growth had been “moderate,” in previous statements, the FOMC now says it “picked up in recent quarters.” And, in response to the weak January employment report, they inserted the word “mixed” to describe the labour market.
"Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters," the statement started.
"Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat.
"Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable".
The only negative so far as economists were surprised was confirmation the Fed remains worried by the low level of US inflation
"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term," the statement read.
Markets will get over this tizz and stabilise over time, but investors will continue to sell off their more leveraged and risky investments (in emerging markets) and retreat to relative safety in the euro, the US dollar, or even the Aussie. That will mean more pain and few gains for the likes of Turkey, South Africa, Brazil, Indonesia, Thailand and even China.
Today’s release of the official survey of Chinese manufacturing, and the final version of the HSBC/Markit survey could add to those pressures if they show a fall, or ease some of them if they still show a modest expansion.
