North American Wrap: Steady as She Goes

Steady as She Goes

There wasn’t much bombast in the trading realm today as the North American session steamed forward at a steady pace and lacked any real motivation for extreme moves.  US data was slightly disappointing this morning as the Markit Flash Services PMI missed consensus of 57.9 with a 57.3 print; Pending Home Sales also fell short of a consensus 0.5% expectation by showing a 0.3% increase on a MoM basis.  While both figures failed to live up to the hype, the reaction was negligible as equities oscillated from green to red for the duration and currencies did virtually the same thing with a slight USD bearish tilt.

The lack of outsized moves may be a consequence of the events yet to come this week as investors look forward to the Federal Reserve meeting on Wednesday.  The Fed is widely expected to completely taper their Quantitative Easing program while keeping interest rates where they are and emboldening their stance of keeping rates low for an extended period of time.  There won’t be any press conference after the decision and statement are released, but there is a slight possibility the Fed could pull a surprise at this meeting.

You see, the Fed left themselves with an out in the last Statement they released in which they stated (emphasis my own):

“If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

I emphasized the “not on a preset course” and “contingent on the outlook” parts because Fed members have been talking a lot about that lately in their speeches heading in to the meeting.  Some members have even gone so far as to say that if inflation begins to waver that they would be open to the possibility of another round of QE.  It only stands to reason that if enough of the Fed members believe QE4 may be something they may need to introduce in the near future, they would be open to the possibility of only tapering $10 billion at this meeting instead of the full $15 billion.  That way they could cement the notion that they are willing to support the recovery without having to invest a great deal more in to the program (in relation to what they’ve already spent).

If they were to go with this path, equity markets may be the biggest benefactor as most market participants are under the impression that QE will be gone after this meeting.  The mere presence of the Fed, even at a comparatively paltry $5 billion, could serve to bolster confidence in the Fed’s pledge to return policy to normal at an extremely deliberate pace, but would also allow the European Central Bank’s QE program to kick in to full gear during the fourth quarter of the year.

Looking Forward

The Asian trading session looks like it will be concentrating on Japanese Retail Sales which is being released at 7:50pm ET.  Much of the hullabaloo around this figure has waned of late as it hasn’t been bad enough to warrant any serious talk about an addition to their QQE from the Bank of Japan.  The last two months have surprised to the upside by growing 0.5% and 1.2% following three straight declines after the sales tax went in to effect.  If there were to be a negative surprise though, chatter about supplementing QQE could get louder and could boost the JPY pairs higher overnight.