- Fed minutes, released early by mistake, had a hawkish tone.
- Obama budget presented, aiming to kick start deficit-reduction talks.
- Market sentiment shrug off the hawkish Fed bias and the rise in pro-cyclical assets has continued.
- Today's calendar is thin, with a few Fed speeches being the most interesting events. Markets Overnight
FOMC Minutes Reveal Tapering Discussion Heating Up
The FOMC minutes (link), leaked accidentally prior to the opening of U.S. bourses, revealed that ‘many’ FOMC participants would like to slow the pace of purchases ‘over the next several meetings’. A ‘few’ participants deemed it necessary to continue at the current pace ‘at least until late in the year’. Importantly, however, the discussion referred to in the minutes took place before the latest indications of a soft patch in growth (ISM manufacturing, non-farm payrolls), which has clouded the outlook. Our U.S. economists still view the September or the October meeting as the most likely time for tapering of purchases.
Obama budget presented, aiming to kick-start deficit-reduction talks. The U.S. President presented the USD3.8trn spending proposal for the 2014 fiscal year, entailing tax increases on the wealthy as well as social security spending cuts. The proposal is meant to lure Republicans into negotiations ahead of the July deadline. See Financial Times for more information.
Sentiment Shrugs Off Hawkish Bias In FOMC Minutes
Overall, the minutes did not change the general perception that weak data will prompt a continuation of asset purchases, i.e. the ‘Bernanke put’ remains in place. U.S. stocks rallied broadly, extending their push into record territory. The S&P500 index rose 1.2%, led by gains in the technology and healthcare sectors. The gains are also spilling into Asia this morning, where particularly the Nikkei continues to perform due to tailwinds from the weaker yen.
Treasury Sell-Off Extended
U.S. Treasuries traded lower for a third day sending the yield on the 10-yr. note some 5bp higher to 1.80%. The FOMC minutes coupled with strong market sentiment also seemed to weigh on demand at last night’s note auction, drawing a higher-than-expected yield (see Bloomberg). Japanese government bonds continue to trade with heightened volatility due to the aggressive easing steps from Bank of Japan and futures dealing was temporarily suspended yesterday as prices plunged (see Financial Times).
Yen Depreciation Continues
USD/JPY almost touched the 100 barrier, despite Bank of Japan Governor Kuroda commenting that all ‘necessary’ and ‘possible’ measures have been taken. Nonetheless, Kuroda also reiterated the commitment to achieve the 2% inflation goal, keeping the door open for further easing (see Bloomberg).
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