Markets Steady Ahead Of Fed's Tapering

Markets are rather cautious ahead of the highly anticipated FOMC announcement. Consensus suggested that the Fed would reduce its Treasury purchases by $10 billion per month, while some expect the MBS buying would also be reduced. The total monthly purchases would be changed to $70-75 billion. Also, the latest set of economic projections would be released. A major reason for Fed to taper is the improvement in job markets. While the August NFP was a disappointment, it should be noted that there was significant improve from the same period last year, when Fed raised asset purchases to USD 85b from USD 40b. Unemployment rate was now at 7.3%, comparing to 8.1% a year ago. The 3-month rate of change on nonfarm payrolls is 148K compared to +94K last year.

Meanwhile, recent rise in the Treasury market has been driven by speculations of tapering. Policymakers would be concerned about the high volatility of the bond market if it fails to deliver in September. San Francisco Fed President Williams warned that excessive monetary easing might lead to formation of bubbles. At a speech on September, he stated that, "actions, including regulatory and monetary policy measures, may have unintended consequences - such as excessive optimism, risk taking, and the formation of bubbles - that are assumed away in standard rational models." Williams reiterated that he saw, "normalization of interest rates as a healthy sign."

More in Fed To Announce Modest QE Tapering In September, Rates To Stay Low For Some Time.

Besides the FOMC announcement, the BoE minutes for the September meeting will be released. Given the traditional short statement released after the BoE meeting, the minutes is awaited as it unveils the voting distribution by policymakers on whether to leave the bond purchases or to adjust them. Nonetheless, it's generally expected that the votes were unanimous. In August, one member voted against the adoption of forward guidance, and we'd see if there was any change during the September meeting.

On the data front, New Zealand's current account deficit came in narrower than expected at NZD -1.25b in Q2. Australia's conference board leading indicator rose 0.3% in July, and the Westpac leading index rose 0.6%. Switzerland will release the ZEW expectation, while the US will release new residential constructions.