Fed Signals Stimulus Could End In 2014

Financial markets were rocked by the FOMC statement and press conference, which suggested that the Fed would taper the asset purchase program later this year, and even end the program mid-2014. The dollar jumped across the board with the dollar index jumping back above the 81.5 level. 10 year yield soared to close at 2.311%, while the 30 year yield jumped to close at 3.414%, both at a new 2013 high. The DOW dropped sharply by -206 pts, or -1.35% but is still held in recent range between 14950/15500 and stayed above 55 days EMA. Gold also dropped sharply, and is back below 1350 level. Asia equities followed and opened lower. There was additional pressure on risk sentiments, as China manufacturing data disappointed and showed deeper contraction.

The June FOMC meeting turned out to be more hawkish than previously anticipated, with policymakers seeing 'diminished' downside risks to the economic outlook. the Fed was not worried about the weak inflation level. At the press conference, Chairman Bernanke indicated his intention to complete the tapering process by mid-2014. The Fed's latest set of economic projection showed downward revision unemployment rate and upward revision of 2014 GDP growth estimate.

The HSBC China PMI dropped more than expected to 48.3 in June, compared to a consensus rise to 49.4. That was the lowest figure in nine months. Drifting further away from 50 break even level, suggests that the manufacturing sector is having deeper contraction ahead. HSBC chief China economist Qu Hongbin noted that "manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures," but he noted that the government would prefer to use reforms rather than stimulus to sustain growth and that would likely have "limited" short-term impact. Thus, Q2 growth in China would be "slightly weaker".

The SNB rate decision is on focus today. President Jordan talked about the topics of raising the EUR/CHF floor and negative rates on commercial bank excess deposits last month. However, markets are not expecting any change in policies this time, as the SNB's hands are tied up by the housing market boom. It's generally expected that the SNB would keep the three month Libor at zero and the EUR/CHF floor at 1.2.

On the data front, New Zealand GDP grew less than expected by 0.3% qoq in Q1. HSBC China flash PMI dropped unexpectedly to 48.3 in June. PMI data from eurozone will be a focus in the European session, together with U.K. retail sales. The Swiss will release also trade balance data. Germany will release PPI. The Philly Fed survey, jobless claims, existing home sales and leading indicators will be released by the U.S.