Look ahead to Federal Reserve minutes for clues of QE taper timing

Ishaq Siddiqi, market strategist, ETX Capital:

Taper blues continue to curb enthusiasm to build risk across equity, commodity and forex markets Wednesday. US Treasury 10-year note still elevated at 2.82% but off two-year highs seen this week. FOMC meeting minutes to steal the show later with many in the market viewing the report as a deciding-factor for tapering next month by the Fed. Must note, FOMC minutes are backward looking so unwise to pin your view on tapering on the minutes alone.

Data in the US has improved since the previous Fed policy meeting but more importantly, various Fed-members U-turned on accommodative easing measures. Fedspeak over the past month suggests greater unity on the FOMC with now more members endorsing a reduction in asset purchases by the Fed. In fact, it’s Fedspeak that has almost convinced the market that September tapering is now inevitable

However, market participants seem to have dismissed the fact that momentum in the labour market remains slow – the Fed may refrain from initiating tapering for that reason as we all know that tapering stimulus is linked to a drop in the unemployment rate which still stands at 7.4%, above the Fed’s target of around 6.5%.

Jim Reid, Deutsche Bank:

The continued debate about the next Fed Chair is not helping sentiment with plenty of air time being dedicated to contrasting Yellen’s supposedly methodological policy approach against Summers’ less bond-market-friendly views on QE. Amid this background, today’s FOMC minutes will garner a lot of attention. DB’s US economists expect the minutes to shed greater insight regarding the breadth and degree of comfort among Committee members toward a near-term QE taper. It will also be interesting to see whether there is any talk about tweaking employment and inflation thresholds with respect to the Fed’s current rate guidance. Recall that the actual meeting statement from July was seen as more dovish than the one from June. Firstly, the statement adjusted its description of growth in the first half of the year to “modest” from “moderate”. Secondly, the statement expressed some concern that the recent backup in mortgage rates could slow the outlook for housing. Thirdly, the meeting statement also included a relatively dovish comment that “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance”.

However, Chairman Bernanke has linked the tapering of asset purchases to near-term momentum in the economy, so with Q2 GDP likely to be revised up to 2.2% next week according to DB’s economists, and with one more employment report ahead of the September Fed meeting, DB think the initiation of the QE taper at the next meeting remains distinctly possible—particularly if the employment numbers improve. Recent public comments from various policymakers suggest that even notable doves, such as Bullard, Lockhart and Evans, are comfortable with—but not yet committed to—a September taper. The lack of conviction largely stems from lingering uncertainty over the health of the labor market and the broader economy, so the August employment report (released on September 6) is likely to be the defining event.

Emily Nicol, Daiwa Capital Markets:

As global financial markets remain on edge about the timing of the Fed’s commencement of tapering, today’s minutes may shed a little more light on the Committee’s views of the economic data at the timing of the most recent FOMC meeting. Although with the tone of the data having evolved somewhat since then – for example, Q2 GDP is set to be upwardly revised to around 2.3%Q/Q annualised and deflationary pressures are seemingly easing – the minutes today are not going to provide a definitive answer as to the whether current economic conditions have progressed enough to start tapering next month.

Mike van Dulken, head of research at Accendo Markets:

More clues will be sought on taper timing, we caution against expecting too much given that these are from July and much water has since passed under the macro data bridge. Latest consensus is 65% expecting a September tapering to $75bn from current $85bn.