Fed Minutes Add Little To Tapering Argument

The Fed offered no further clarification on its plans to taper its asset purchase program in the minutes of its latest meeting, released last night, save to say that it would “be likely in the coming months”. This differs little from recent speeches from members of the Federal Reserve that emphasised the data dependency of the policy. Should current labour market conditions be continued into December, then some form of stimulus reduction is very much on the table in our eyes, although we think unlikely, given the poor state of inflation and growth still slack.

James Bullard, another FOMC member, spoke in Chicago yesterday with the overall tone of the speech coming down on the side of the doves. Bullard reiterated that while labour market progress was looking good and was the “key idea”, he was “worried” that he hasn’t seen inflation pressure in the United States. While deflation pressures in the US are far off, yesterday’s CPI release saw consumer prices rise just 1.0% in the year to October, half the Fed’s target and the smallest gain since October 2009.

We are still looking for a reduction in stimulus to take place in 2014 but also an end to this interminable will they won’t they soap opera. Dollar is slightly stronger overnight but remains very much in previous ranges.

The Bank of England’s minutes were even less market moving than the Fed’s. Last week’s Bank of England inflation report took a lot of the pressure off this BOE minutes release and there was little new in yesterday’s publication. Last week, we heard that the Bank’s expectations of when it will see the 7.0% unemployment threshold had been moved into Q3 2015 from Q2 2016, but that even if that mark is hit, rates in the UK are not guaranteed to go higher. These minutes do nothing to move that.

One comment from yesterday’s publication particularly sticks out from the recent optimism surrounding the UK economy: that the MPC believes “there is uncertainty about durability of (the) recovery”. Hopefully this is an acknowledgement that while some survey data, particular that surrounding the recovery in housing, has been hitting record levels, key facets of the recovery – wage pressures in particular – remain significantly below par.

Sterling had run higher into the announcement on the hopes that some members may have seen the threshold being brought in further than Q3 2015. It was flat on the day versus EUR and USD.

Euro took a shot to the gut yesterday following an unattributed comment from an ECB official that the ECB was discussing negative rates in a bid to further loosen monetary policy and generate further spending. Unfortunately, cutting reserve rates to below zero is one way of crushing any recovery from the credit crunch that Eurozone credit markets are currently going through. The Germans and the Bundesbank are unlikely to go for this given recent protestations that monetary policy is already as loose as it can get.

Euro is on the back foot this morning following a poor French PMI that saw both manufacturing and services PMIs slipping back into contractionary territory. German and Eurozone wide data is due through the morning.

The most closely watched US figure today will likely be the jobless claims numbers at 13.30 GMT given the emphasis placed on the recent trend of job creation stateside. The market is looking for a continuation of the recent post-shutdown improvement and movement down to 335,000 claims.