America shocks markets

19 September 2013

The Federal Reserve took everyone by surprise with an extremely dovish FOMC (Federal Open Market Committee): Fed Chairman Ben Bernanke explicitly separated tapering from any “magic” employment number. He went so far as to say that because of the way it is measured, the unemployment rate is a decidedly inaccurate gauge of conditions on the job market. In addition, Bernanke dramatically revised US GDP estimates for 2013 and 2014 downward, letting it be known that there will be no scaling back of the Fed’s acquisitions at least until December. The market was positioned terribly for the news, with expectations of an immediate tapering in the range of $10-15 billion per month: violent responses inevitably ensued, with 10-year treasury yield resuming its fall, emerging markets subject to heavy covering and all low-quality bonds back to the bid.

We will soon find out how the ECB will react to this unexpected change of stance in America: one possibility is that an overly strong single currency will not be tolerated at a time when the Eurozone’s recovery is still hanging by a thread.