Septaper? I Still Don’t Think So

For a bank running forward guidance so as to guide the market and consumers as to the likely path of interest rates you’d have to say that they’re not exactly doing a great job. They always say that you can put 2 economists in a room and come out with 3 opinions but the lack of clarity in last minute’s Fed minutes was once again disappointing to see.

The headline that most have seized upon is that the committee showed ‘broad support for Bernanke tapering timeline’ but the key word through the entire release was ‘contingent’ – tapering will only occur if the pace of improvement in the US economy continues at its current pace.

The overall tone of the minutes were bullish overall towards the US economy with ‘solid growth’ in payrolls, consumer spending ‘picking up’ in the 2nd half of the year. The committee also predicted a pick-up in overall growth as well through the last few months of 2013 but then again when do they not?

I’m still happy in my belief that September is still too early for a reduction in the Fed’s asset purchase plan given the uncertain labour and growth outlooks and the fact that the key inflation measure used by the Fed is still massively below the 2% level they view as normal. Aggregate demand needs to be stoked not stymied at the moment. I would not be surprised if the next G20 meeting signals a chat around US monetary policy given the damage that the tapering argument has done to emerging markets over the past few weeks..

Dollar is slightly stronger against its G10 counterparts but has continued strongly against the EM basket cases. INR has once again hit another all-time low – a daily occurrence nowadays – while ZAR, THB, MXN, TRY are all getting hit hard as well.

GBP has come lower overnight after an interview with Martin Weale, the MPC member who dissented at the August meeting, that softened his hawkish credentials. Weale, who had worried about near-term inflation pressures, told The Telegraph that he would “certainly envisage circumstances in which it would be sensible to undertake further asset purchases” alongside the forward guidance the Bank is currently using.

European growth and the prospects for it will be once again in focus this morning with provisional PMIs from France, Germany and the overall Eurozone due. Both French and German GDP figures in Q2 were better than expected and so have raised hopes that the trend can be continued. Euro is lower against the USD but stronger against GBP as we open up this morning.

Jobless claims are due today with it being Thursday. The market is looking for a figure of around 330k, slightly higher than last week’s brilliant and multi-year low of 320k.