Taper time

Stock markets are relatively flat on Wednesday ahead of the highly anticipated Fed decision that’s only a few hours away.

I say highly anticipated but, like a terribly kept secret, we’re all aware of what’s almost certainly going to be announced. A taper of their asset purchase program by USD 15 billion per month – USD 10 billion in Treasuries, USD 5 billion in mortgage-backed securities – would bring an end to the program in the middle of next year which takes us to the question we all want the answer to. What then?

Despite Powell’s best efforts to convince everyone that tapering and interest rates aren’t linked, hikes are already being priced in for next year with the first expected almost immediately after tapering is anticipated to draw to a close. More rate hikes are expected to follow soon after. With that in mind, will Powell and his colleagues continue to cling to their belief that inflation is transitory?

I think that will inevitably be dropped at this meeting or the next, when new projections will allow them to re-evaluate their position and communication. Their views won’t dramatically change, they’ll still insist that pressures are being driven by temporary factors and will pass naturally over time, but that it may take longer than initially believed.

That will allow them the space to bring forward expectations for rate hikes to align more with the markets over the next couple of years. Whether investors will stay on board with that is another thing. US stock markets are trading around record highs going into the meeting as we’re coming off a very strong quarter of earnings, which has taken priority over downside risk fears that had weighed in the run-up to the reporting season.

The economy will have to continue showing signs of significant improvement to keep investors on board as they adjust to a world without central banks keeping rates at extremely low levels. Given those headwinds, I’m sure we’ll see big fluctuations in economic and rate expectations over the next 12 months but for now, investors look surprisingly comfortable.

US data gives plenty of cause for encouragement

The data from the US has provided some encouragement at just the right time, given the new phase that the Fed is about to embark on. The ADP employment data comfortably surpassed expectations at 571,000, setting us up for a potentially strong jobs report on Friday following last month’s lacklustre performance.

The ISM services PMI was also a bright spot, rising to a record high as business activity and new orders surged to their highest ever levels. This bodes well for consumers going into the holiday period after the setback of the delta wave. The only downside to the data was the jump in delivery time, prices paid and order backlog which suggest bottleneck issues are getting worse rather than better ahead of the holiday period.

Bitcoin struggling for momentum

Bitcoin is a little lower on the day after bouncing back strongly on Tuesday. It’s struggling to generate an enormous amount of upside momentum as it continues to drag itself higher since slipping briefly below USD 60,000 last week. Perhaps that’s a sign of a larger correction to come. Although sitting so close to record highs, I don’t feel it will take much for that momentum to return.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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Former Craig

Former Craig

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.