Global Markets Overview - 11/21/13

Misinterpreting the Fed part 2

Blurred language out of the Fed has again poured cold water on the markets understanding of where it stands on the monetary stimulus component of its quantitative easing policy.

Inside the last 24 hours the market has seen some very contradictory statements. First, Fed Chairman Ben Bernanke stated that the current policy settings are here to stay, that the current economy conditions have not reached the levels they believe are conducive to unwind the current monetary policy settings and that he expect normal setting to be a long way off.

This is not new at all; the market has known for a very long time what his stance is on the current conditions. He is has stated in the past that unemployment needs to be more around 6.5% rather than the current 7.3% to see changes to the current settings.

He also believes inflation is still well below the 2% level that he set out at the beginning of the program and that looks firmly entrenched below that mark (which should also be a concern considering the Fed's balance sheet hit $4 trillion in the last month).

I also found his comment regarding Janet Yellen interesting: "I refer to my colleague Janet Yellen's testimony as how the policy will remain." The translation I see from this is that he has already handed the reigns over to Yellen and it is her remarks the market should be listening to, not his.

Having seen New York Fed President Bill Dudley muddle his tone with "[I'm] getting more hopeful" that the US economy is strengthening a clear sign for the unwinding of QE, however in the same breath stated "policy will likely remain accommodative for a long time to come".

In her testimony last Thursday, Chairperson-elect Janet Yellen stated the economy hasn't reached its "potential" yet and for that reason believes the current policy stance should remain, and by definition 'potential' is an interpretative word.

All of this is dovish in tone and almost ironclad that the $85 billion a month of purchase is here to stay in the short term.

However, the release of the October minutes has completely reversed that perspective and turned the USD on its head.

"[It's] generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months."

That comment sent the USD rocketing higher; AUD/USD fell 1.2% in US trade to the 93 cent floor. The only way the AUD will fall through this mark is on USD strength, not AUD weakness, and with the HSBC Flash data out at 12:45 AEDT today a good print should see the pair stepping away from the bottom end of the handle, but would break through on more talk of unwinding policy metrics.

The other issue the market has wanted to understand is the baseline marks that the Fed needs to see to actually move on the current policy stance, and the minutes showed that "some supported reducing the 6.5% unemployment rate threshold, while others said that change may cause concern about how committed the Fed is to the thresholds."

I believe the biggest issue in the current macro environment is interpretation; it is why current market moves are becoming choppy and the front running of Fed is increasing. Language seen in the minutes will create one thing, volatility, and that will see equity markets in the red and currencies moving violently.

One thing that has been effectively communicated to the market is about the Fed funds rate; with interest rates to remain near zero. The dovishness here looks to be universal and the market is syncing perfectly with this message illustrated by the future Fed funds rate for July 2015, remaining almost unchanged at 0.52% on the release of the minutes. If only it could communicate this clear on tapering.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 down 18 points to 5289, down 0.35%, having been in the green before the drop of the Fed minutes.

BHP's ADR is suggesting the stock could rise a handful of cents. However, this looks unlikely to remain over the session considering commodities fell after the Fed results as the prospect of a strengthening USD is a negative for risk and cyclical plays, and it is likely that the sector will lead the market lower.

Today should be the fourth straight day in the red, and would mean hitting a four and a half week low. I expect this to remain for at least another few weeks as market fatigue sets in.

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