Daily Market Update 22 August 2013 - When taper ‘talk’ becomes taper ‘time’
Almost guaranteeing that the US Federal Reserve will begin tapering asset purchases before the year is out, the minutes<http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130731.pdf> of the July FOMC meeting were released overnight with ‘almost all’ members confirming ‘that they were broadly comfortable with the characterisation of the contingent outlook for asset purchases that was presented in the June post-meeting press conference and in the July monetary policy testimony.’ In other words, the tapering timetable laid out by Chairman Ben Bernanke in both, almost all are in acceptance. While there is now little doubt the committee will begin tapering, most likely at their upcoming September meeting should the economic data warrant, it was interesting to see that ‘some’ members noted that ‘financial market conditions had tightened significantly’ and ‘expressed concern that the higher level of long-term interest rates could be a significant factor holding back (both) spending and economic growth. Given the benchmark 10-year note yield is up in excess of 30bps since this meeting was held, it does raise the question as to how much the Committee will be willing to taper asset purchases in light of already-surging yields. With markets already expecting first-round tapering of $15b, something that’d take purchases to $70b per month, it does suggest they may be more cautious when they do decide to taper to ensure the rise in long-term rates remains in check.
US existing home sales surged in July with the NAR reporting<http://www.realtor.org/news-releases/2013/08/existing-home-sales-spike-in-july> an increase of 6.5%. The figure was above the 1.6% rise that had been forecast by economists and completely offset the downwardly-revised 1.6% decline of June and left the annual pace of sales at 5.39m, the highest rate seen since November 2009. Rising home values, up 13.7% Y/Y to an average price of $213,500, continued tight supply, unchanged at 5.1 months at the current rate of sales, along with likely institutional buying are all likely to have contributed to the hefty monthly increase.
US mortgage demand continued to slide last week with the MBA’s mortgage market index falling by further 4.6%. The decline was the 11th contraction seen in the past 13 weeks, a period that happens to coincide when Ben Bernanke first floated the idea of tapering, and left total mortgage demand at levels not seen since May 2011. As you might suspect with all the tapering talk and subsequent move in yields, higher interest rates were the chief catalyst behind the plunge with the average 30-year rate rising by a further 12bps to 4.68%.
UK industrial output hit the highest level since March 2011 in August with the CBI<http://www.cbi.org.uk/media-centre/press-releases/2013/08/output-growth-reaches-two-year-high-for-uk-manufacturers-cbi-survey/> industrial trends survey rising to +25. The figure was well above the +15 reading seen in July with the order book balance also improving from -12 to 0.
UK public sector borrowing rose unexpectedly in July with a deficit of £62m reported<http://www.ons.gov.uk/ons/dcp171778_323537.pdf>. The figure was below the £2.45b surplus that had been expected by the markets and was the first year in three that a July deficit had been recorded.
The Day Ahead (All times AEST)
The Annual Kansas City Fed Economic Symposium at Jackson Hole gets underway this evening. While it is missing many big names including the headline act of recent years, Fed Chairman Ben Bernanke, with Deputy Chair Janet Yellen, Bank of Japan Governor Kuroda and IMF Managing Director Christine Lagarde all in attendance, it’s likely that some market-moving news will derive from this 3-day economic get-together .
The busiest day of the domestic reporting season arrives today with Alumina, ASX, Atlas Iron, Brambles, Cabcharge, Echo Entertainment, Fairfax, Fortescue Metals, IAG, Seven West Media, Sydney Airport, Toll Holdings and Wilson HTM just some of the better-know names scheduled to report.
The ASX 200 looks set to follow Wall St deep into the red this morning with SPI futures pointing to a fall of 41pts on the open. While there is a plethora of earnings reports to digest, something that in normal circumstances would dictate the market’s direction, if there is to be any recovery today, it’ll have to derive from a strong manufacturing PMI print from China at 11.45am.
The AUDUSD has been hit hard following the release of the hawkish FOMC minutes with the pair opening the Asian session buying .8971. As is the case with equities, with the pair already under pressure following the rise in US yields, the Chinese PMI print looks like a make-or-break moment for the Aussie today with a strong reading likely to stabilise the decline while another sub-50 reading will send the pair hurtling lower on the back of increased risk aversion. Support is found at .8920, .8880 and .8850 with resistance kicking in at .9000 and again at .9050.
Chinese manufacturing activity will be at the forefront of investor’s minds today with the release of HSBC’s ‘flash’ PMI gauge for August at 11.45am. Given improvements in the data elsewhere, markets will be looking to see whether this ‘independent’ release mirrors the improvements seen elsewhere. Alongside that number, markets will also receive foreign stock and bond holdings from Japan along with unemployment data from Taiwan.
A busy economic calendar this evening with manufacturing and services PMI’s from the Eurozone, Germany and France, jobless claims, monthly house prices, the leading index and Kansas City Fed manufacturing from the States and Swiss trade figures all scheduled for release. As you would expect, most attention will go towards the PMI data and jobless claims with the former set to make-or-break the case for a recovery in Europe while the latter will be watched closely given events overnight.