Markets drift following non-committal Fed

• Stimulus will come but world needs to be hurtling towards the precipice first

• Bank of Japan holds rates while Koreans cut in face of slowing output

• Rajoy launches new austerity drive as miners riot in Madrid

• US jobless claims the main number at 13.30.

Fed minutes come and go and this was no clearer than last night with the Fed statement providing the market with little impetus. The bias on the FOMC was definitely one of further stimulus but as we pointed out yesterday, the committee is nowhere near voting for it yet. The economic data globally is poor at the moment but not at the levels seen in 2009 and the board may simply be waiting for us to slip closer to the precipice.

I don’t think there is a line in the sand as to where further stimulus will be forthcoming but catalysts in the back of central members’ minds will be further slips in employment, consumer confidence and inflation.

In the run up to the publication of the minutes markets were fairly quiet although we saw a lot of interest in yen markets. Rumours were flying around as to what was happening as USDJPY went supersonic towards 80.00 with the subsequent dollar strength pressing GBPUSD and EURUSD lower. The most obvious rumour was that the Bank of Japan was “checking rates” – a shot across the market’s bows that an intervention may be forthcoming or some kind of change may be made at the overnight BOJ meeting.

As it stands, the Bank of Japan meeting also disappointed the market by doing relatively little and USDJPY has slowly begun to drift back down from its overinflated levels. South Korea did cut rates however, by 0.25% to 3%, on fears of a slowdown in output. South Korea are simply the latest Asian country to cut rates, following similar moves from China, Singapore and others in recent times.

European debt remains the other side of this rapidly devaluing coin and peripheral debt got a move in the right direction from the publication of the latest austerity measures in Spain. This is Mariano Rajoy’s 4th austerity package since taking the position of PM in November in which he has gone back on significant campaign promises. His party swept to power on a ticket of not raising taxes, in particular VAT. Yesterday he announced VAT was to rise by 3 percentage points to 21%, all while miners are protesting on the streets.

The total for the new austerity package sits at a whopping EUR65bn. This would be difficult to swallow in an economy punching out strong output figures. Spain is expected to shrink by around 2.5% in 2012 and this will hang like a noose around the economy’s neck.

Nothing has come out in the past 24hrs, or in the past week really, that is able to stop this gradual slip lower in risk and so we expect the market to remain happy to buy USD versus the EUR. Sterling breached 1.27 yesterday briefly but has since slunk back as cable has slipped below the 1.55 level.

Today’s jobless claims number will be the most important of the session. They are due at 13.30 and expected to show a figure around 370k.

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