08 Jul Taper Taper…..

So the US Federal Reserve (the equivalent of our Reserve Bank has announced that they will at some future point of time (subject to economic data) reduce & eventually stop the purchase of US Government Bonds (currently $85 bn per month). This currently has the effect of pushing $85 bn of cash into the US/Global financial system each month. Over the past couple of years this has had the effect of: –

reducing the value of the $US Dollar relative to other currencies

• bidding up prices of defensive assets (gold, etc.)
• incorporating short term carry trades (borrow in low value currency $USD & invest in high value currency $AUD – Australian dollars)
• reducing the interest rates on long term US Government Bonds to record lows (as low as 1.6% on 10 year bonds)

So recently on the announcement that the bond purchases would likely be tapered at some future point has caused an unwinding of all of the processes as outlined above: –

• the $USD has increased in value against all global currencies (& the $AUD declined)
• Gold has dropped in price
• Short term carry trades have been unwound
• US 10 year Government Bond yields have jumped to 2.7%
• So in the short term the potential tapering (remember they have not done anything yet) has created short term market volatility. Ben Bernanke only commented last night (11/7/13) that the US job market is weaker than the 7.6 percent unemployment rate indicates and that inflation, which is running at about 1 percent, is below the central bank’s target of 2 percent.. “So you put that all together, and I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” he said at an event hosted by the National Bureau of Economic Research. .Bernanke also reiterated that the Fed may continue to maintain its policy of super-low interest rates even after the unemployment rate falls below 6.5 percent. The “overall message is accommodation,” he said seemingly to emphasize the point.
• Longer term when bond purchases are tapered this will prove to be a positive step, in recognition that the US economy is recovering & “green shoots” beginning to appear. The USA is such a large country and economy it is always hard to read month to month data, given the magnitude of the place (it is still the world’s largest economy). Reducing levels of unemployment is always difficult as it takes employers a significant period of time to change their approach – they need to see sales/profits or demand for their products/services improving before taking on new employees (i.e. see the silver lining). In June for example it was reported that 195,000 jobs were added to the US economy & jobs figures are believed to be upgraded for both April & May.
• Eventually the US economy will be able to stand on it’s own 2 feet without the extra financial support that it is currently receiving & it’s economic growth might just surprise on the upside over in due course. The USA enjoys low energy prices & is predicted to be completely energy independent by the year 2020 (has a nice ring to it doesn’t it). We are also presently seeing an increase in housing prices in some parts of the USA. Keep your eyes pealed for consumer confidence signals & over time jobs growth as these will likely prove to be good leading indicators of economic growth over the medium term. This isn’t to say that there won’t be speed bumps along the way, but as in Ben Bernanke’s comments the US Federal Reserve continues to indicate that it will keep supporting the US economy, US financial system & by default the world financial system