Time to get real, or a t least try.
The taper brigade got the rug pulled out last night as I expected. Not only did Ben disappoint, he went full-on the other way by pumping up QE.
We got a round of dollar selling that due to a mix of ingredients, ended up a rout. The moves last night and today remind me of a Newtons cradle. The force swings to the extremes each way gradually reducing as time goes on.
So has anything materially changed since last night?
Fundamentally, no. The call has always been that QE will reduce when the data says so. The problem is, and this is something I was discussing with Adam only a a day or so ago, that I believe some or many in the Fed are getting anxious over QE at it’s current level. It’s one thing to come out gung-ho at the beginning of the crisis and make a statement saying that QE will be unlimited but it’s another thing to find out that QE is actually becoming unlimited.
It’s not meant to be unlimited (in a time sense). It’s meant to help the economy repair and recover before falling to the wayside. The balance sheet is growing and the economy is not picking up as he would hope. That has surely got to put some doubt into his mind.
Whether Ben is starting to feel anxious is open to debate. On the surface he seems not to be but the fact that he brought tapering to the foreground in the first place may tell a different story.
He wants the market to be ready for tapering and rate rises and that’s all well and good but the market is now straining at the leash for it.
So we’re back in the flux of the will we, won’t we game. The data will be the driver but it’s the anxiousness of QE that may be playing out in the market now. We know the market hasn’t got patience. We know the market is starting to adjust to the end or reduction of QE.
At some point soon, maybe tomorrow, we should be back to some sort of normality and we can get back to trading the data.
One sobering thought for you though, if the Fed are getting hot feet over QE levels now, and the market is gearing up for the exit, think what might happen if the data really deteriorates and the spectre of increased QE rears up.