- Minutes show FOMC looking for timing of QE exit mid to late 2013.
- Stocks retreat, USD gains, Treasuries sell-off extends.
- Focus today on services PMIs out of eurozone countries and the US employment report.
The New Year risk rally is fading as markets have shifted focus from U.S. fiscal policy to monetary policy after the December FOMC minutes revealed that stimuli might be withdrawn more quickly than markets expected.
The minutes from the December FOMC meeting, which notably saw the Fed shift Operation Twist into new bond buying and introduce explicit thresholds for inflation and unemployment to be reached before the Fed fund rate is to be lifted, took markets aback in underlining that a majority of members expect that the current USD85bn monthly bond purchases will need be reduced sometime during the course of 2013. Risks to financial stability and the size of the Fed balance sheet were cited as key concerns for the FOMC in relation to its quantitative easing (QE) programme. While members disagree on whether the end of QE should be dated mid or late year, markets had seemingly become too preoccupied with the sheer scale of the programme and lost sight of the timing of the eventual exit, which may now come earlier than previously anticipated.
This underlines that while the U.S. debt ceiling could be an occasional show stopper for risk in Q1, an even greater one, i.e. speculation on Fed exiting QE, could be in store for Q2. See Flash Comment: US - FOMC minutes: asset purchases to end in 2013, 2. January.
Overnight, the Chinese HSBC services PMI dropped to 51.7 in December (from 52.1), a moderation in activity that contrasts with the pick-up in activity within manufacturing lately seen earlier this week, see Flash China: Mixed PMIs but it still looks like a happier New Year, January 2, for details.
In equity markets most U.S. indices ended the day slightly lower and Asia has overall tracked these losses. In Japan a catch-up rally was seen as trading resumed after the seasonal holiday ending yesterday but this rebound is unlikely to be extended much further judging from recent days’ experience in other regions. The sell-off in U.S. Treasuries continued on Thursday after the FOMC minutes suggested an early end to QE, thus adding to the losses seen earlier in the week. Notably the intermediate part of the curve was hit this time round, following the significant yield rises seen in the long end during Wednesday’s risk rally; the 6-30Y segment saw yields end up around 6bp on Thursday. In FX markets the U.S. dollar has gained against all major currencies including the yen as the release of the FOMC minutes served as a reminder that the Fed is starting to look at timing its exit from QE. Commodities are similarly giving in to the fading of risk appetite, heading south across the board overnight.
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