The curtain has fallen on the latest round of asset purchases from the Federal Reserve as the Federal Open Markets Committee brought the QE3 plan to a close last night at their October policy meeting. It was not this move however that set a fire under the US dollar in the immediate aftermath but additional comments around the state of improvement in the US economy.
The starkest change occurred in language pertaining to the US jobs market. Previous statements have talked about a “significant underutilization of labor resources”; Fed speak for high unemployment and therefore a large degree of spare capacity in the US economy. Last night that changed to “On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing”. While this may seem like only a small change in the emphasis on the US jobs market, traders had expected an overly dovish statement from the Federal Reserve.
All members of the FOMC were in agreement with the statement with only Narayana Kocherlakota, the most dovish member of the committee, dissenting. As someone said on Twitter last night; “If the doves are dissenting, then you know it’s hawkish”.
Comments on inflation also increased the strength of the US dollar, although we must wait on December’s meeting for updated forecasts to see whether recent falls in inflation expectations globally have had an impact stateside. With our eyes now turning to what the Federal Reserve could possibly do in December we once again must focus on the “considerable period” phrasing within the Fed’s statement.
During this March’s meeting Janet Yellen miss-spoke in answering a journalist’s question about how long “considerable period” might be. The newly-installed Fed Chair said that it would be around 6 months. Stocks collapsed and the dollar flew higher as traders re-priced their thoughts on when the first rate hike would take place. Given last night’s statement, there is a very real chance that we could see this “considerable period” language dropped at the December meeting this putting the Fed in a position to hike interest rates by June/July.
Markets are already doing some of the heavy lifting on this. The prospects of a hike by July of next year have increased from 40.4% on Tuesday to 51.8%. The expected date of the first hike has been moved in by one meeting as a result of last night’s statement with the 2nd rate hike moved in by 2 meetings. So much for the Federal Reserve apparently being “behind the curve”.
Of course, the emphasis on data has to remain. Falling inflation prospects, slowing jobs growth could derail this newfound hawkishness. Next week’s PMI run and payrolls number are all important, as is today’s GDP number. The first reading of Q3 output should be positive given recent trade and consumption numbers. Any reading above 3.0% on an annualized basis is a good number and will continue the greenback’s run higher.
Our thoughts around the NZD were also proved right yesterday evening as the RBNZ gave the currency another smack. “A period of assessment remains appropriate before considering further policy adjustment,” Reserve Bank of New Zealand Governor Graeme Wheeler said after keeping the policy rate at 3.5%. The central bank left out a comment that has been in previous communications in that they expected some further policy tightening would be necessary to contain future inflation. I remain bearish the NZD into 2015.
