Tick Tock On The Tapering Clock

Movements so far this Monday morning have been particularly few on the ground as traders and investors wait on this week’s meeting from the Fed’s FOMC rate setting committee. While no movement is expected in the form of policy, the language around the status and sustainability of the US recovery will make or break recent runs for certain assets.

The IMF decided to cut next year’s growth outlook for the US to 2.7% from 3% in April. Attached to this was a comment that the Fed should stay alert regarding the timing and extent of any tapering of asset purchases. I think they know that already.

As I said on Friday I am slightly away from the market’s expectations in that I believe that the Fed will not ‘taper’ away its asset purchases until next year. The latest numbers from the US jobs market have simply not been good enough in my eyes; additions to payrolls have not been above trend regularly and the unemployment rate is not improving consistently.

Fold in the likelihood that the world economy is likely to remain in a below trend growth cycle through Q3 and I would think that the Federal Reserve will err on the side of caution; especially as inflation expectations remain so firmly anchored.

In the meantime, the dollar is likely to remain very dependent on its own data until the committee’s thoughts are known on Wednesday evening (7pm BST).

In the meantime, the focus will likely switch to a Northern Irish golf resort as the G8 meet. Syria will top the agenda with oil prices moving higher as language from Washington suggests Obama is ready to start arming the rebels in Syria following the use of WMD by government forces.

The outlook for the AUD took another hit overnight as country specialists once again downgraded growth expectations and raised the prospect of QE by the Reserve Bank of Australia. While we think the latter is unlikely the prospect of lower growth as non-mining businesses continue to struggle only increases the chances of rate cuts by the central bank. We expect a 25bps cut at the bank’s July meeting.