Fed confirms tapering schedule, markets rally on positive sentiment

Thursday, December 19, 2013

The US Fed has announced it will begin tapering QE to $75bn a month from $85bn previously after stronger than expected housing and labour market data over the past few months prompted the central bank to begin winding down its asset purchase programme. Wall Street rallied higher on the announcement, with the S&P 500 gaining 1.66% as the index closed at a record high just above 1,810. The DJIA also managed to reach an all-time high, closing at 16,167.97 after gaining 1.84%. The cuts in bond buying will be split between treasuries and mortgage bonds, with purchases of $40bn and $35bn respectively, starting in January. The FOMC decided to keep the target rate unchanged at 0.25% with Bernanke stressing that further reductions would be dependent on inflation and employment data.

Markets were also supported by stronger than expected housing starts in the US, which rose to their highest level in over five years in November, increasing 22.7% m/m and providing further insight into a recovering construction sector. The substantial m/m increase in November after October housing starts added 1.8% m/m and September housing starts pared 1.1% illustrates that up until recently demand had been sitting on the side-line as consumers held off until further guidance from the Fed.  

UK unemployment fell unexpectedly to 7.4% in October from 7.6% the previous month as 250K workers were added in the three months to October, significantly above the 165K expected by economists surveyed by Bloomberg. The stronger labour market data may prompt the BoE to revise its forward guidance on interest rates. The ILO unemployment rate has dropped below 7.5% for the first time since May 2009 and while the Bank of England has stated they will not consider an increase in interest rates until unemployment drops below 7%, the tumultuous path of economic recovery could force a rethink of guidance.

Chinese equity indices extended losses in overnight trading as concerns regarding higher funding costs spooked investors. The seven day repo rate has spiked towards 9.5% as fears over tighter liquidity put pressure on the Shanghai Composite and CSI 300 as they closed down 0.95% and 1.05% respectively. Markets may remain under pressure despite the recent effects that better than expected economic data has had on global economic sentiment.

Plenty of data to keep market participants occupied today with retail sales in the UK hoping to build on the recent positive market sentiment, spurred by falling UK unemployment. Over in the US, weekly jobless claims, existing home sales, the Philly Fed index and the Conference Board leading index will provide markets with the necessary catalysts after a relatively quiet first half of the week in the run up to the FOMC meeting.

US monthly housing starts recover back to 2008 levels

NHSPSTOT Index US New Privately 2013 12 19 07 55 37


UK unemployment falls below 7.5% for the first time since May 2009

UKUEILOR Index UK Unemployment 2013 12 19 07 38 10


Chinese seven day repo rates spike on liquidity concerns

RP07 Index CHINA INTERBANK REPO 2013 12 19 08 03 54



Events for today: Wednesday, 18 December 2013

0930

UK

Nov

Retail Sales

1330

US

w/e

Jobless Claims

1500

US

Nov

Existing Homes Sales

1500

US

Dec

Philly Fed

1500

US

Nov

Lead Indicators

1530

US

w/e

EIA Nat Gas

  View Economic Market Calendar

 

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