Nothing stimulates

Written by fe Bureau | Mumbai | Updated: Sep 20 2013, 16:11pm hrs
The US Fed stumped the markets on Wednesday by its decision to continue with its $85-billion bond-buying programme. Brokerage houses give their take on a move largely seen as unexpected.


Markets are thrilled and the much-needed reprieve for the battered Emerging Markets (EM) investors is on its way, said HSBC. Even India and Indonesia, experiencing balance of payments pressures of late, should benefit nicely, said Frederic Neumann, co-head, Asian Economics Research.

With Chinese data having turned up, and the Bank of Japan running at full speed, it looks like Asia might get its mojo back. Whether this will stick depends on reforms. The window will not be open for long: The Fed still thinks it will be done with QE by mid-2014 and tapering has probably been postponed by only three months, said the note by Neumann.

According to the global financial major, the Fed decision is a big relief for Asias hard-pressed emerging markets. HSBC, however, said it expected that the FOMC will decide to start moderating the pace of QE purchases at its December meeting. By that time, fiscal policy risks, which appear to have played a part in staying the Committees hand on tapering at this time, should be resolved, and policymakers should have enough evidence by then of a modest pickup in economic growth and a rebound in the inflation rate closer to its 2% medium-term target, said the global financial major.

In the context of the recent sell-off in the Asian markets, HSBC said that the plunge... had much deeper sources and tapering fears were just a trigger.

In many Asian economies, growth fundamentals have gradually deteriorated for years. Easy cash has been a decidedly mixed blessing for the region. While it helped to buffer export-dependent economies from the malaise in the West, it also blunted any incentives for structural reforms and enabled a dependence on debt to sustain prosperity amid slowing growth in productivity, it said.

However, it went on to add that the fact that the money train will continue for a while means the risk of a hard-landing or a balance of payments crisis has been greatly reduced, if not averted.


Citigroup, in a research note, expressed surprise over the Fed move. It said that the decision was a tough one as the FOMC in its policy statement observed that improvement in economic activity was consistent with growing underlying strength. The brokerage said while the tapering could begin by year-end, a lengthier debate dragging into next year could not be ruled out.

Tapering may still be a meeting-to-meeting call, down to a small handful of data points, market developments and safe passage through fiscal legislation. The last of these could prove the most problematic for tapering this year, said Robert V DiClemente, economist, Citigroup.

We could begin (tapering) later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy, said Fed chairman Ben Bernanke in a press conference after the FOMC meet.

Members of FOMC were concerned that recent tightening measures could slowdown economic growth. Policymakers were less confident that improvements in the economy and labour markets would be sustained, despite much progress. They also expressed concern about recent rapid tightening in financial conditions and want to see the response to higher rates in housing and across economic activity, the brokerage said in its note.

Citigroup further added that the economic projections underscore the view that the policy would remain accommodative deep into recovery.

Morgan Stanley

Morgan Stanley observed that Feds decision has convinced markets to accept its dovish guidance.

The surprising FOMC decision convinced investors to fully embrace for now the Feds dovish rate guidance through 2016, supporting a substantial repricing of the medium-term fed funds rate outlook and strong corresponding seven-year-led gains in treasuries to the lowest yields in five weeks, the brokerage said in a note.

The brokerage added that markets have embraced FOMCs projections regarding economic growth after Feds decision to continue with its bond-buying programme.

The FOMCs projections that the economy will be at full employment at the end of 2016, the inflation rate will be near the 2% target, but that the nominal fed funds rate will only be at 2% (and the real rate thus near zero) are hard to reconcile, but the signal from the QE tapering surprise drove the market to fully embrace that projection, with euro-dollar futures moving into line with a 2% end 2016 overnight rate, and the timing priced for the first hike shifting out to mid from early 2015, the note stated.

Contrary to FOMC assertion, Morgan Stanley felt that there hasnt been much tightening. Sure, theres been a significant rise in mortgage rates, but risk assets are at record highs, the Feds broad trade-weighted dollar index hasnt moved much (up about 2.5% since the recent lows in early May), lending conditions have continued to ease, and heavy demand for record corporate and SSA issuance has clearly demonstrated that capital market conditions remain highly accommodative and supportive of growth, it said.

There is now more uncertainty over when would Fed start tapering of quantitative easing. Fed chairman Ben Bernanke said that the central bank is looking for more data to confirm the economy has picked up.

At this point, who knows what that means specifically in terms of near-term incoming data looking ahead to the October 29-30 and December 17-18 FOMC meetings We dont have any good sense of what the Feds reaction function is at this point, so our initial baseline is flip a coin on QE tapering at upcoming meetings. One thing to keep in mind as a potentially increasingly important consideration for policy decisions may be vice chairman (Janet) Yellen effectively taking more of the lead even before chairman Bernanke steps down early next year, the brokerage said.


After the US Federal Reserve surprised the market by choosing to hold back tapering of its bond-buying programme, UBS now believes the US central bank will not begin tapering until the first quarter of the next calendar year.

Analysis by the Swiss financial services and investment banking firm suggested the FOMC will not begin the long-awaited tapering of QE3 in its October 29-30 meeting due to budget concerns. The Fed will also prefer to avoid any tapering in its December 17-18 meet due to the key holiday shopping season.

We are resetting the clock to Q1. We believe the Fed will not begin tapering until the first quarter of 2014, with the January 28-29 FOMC meeting somewhat more likely than the March 18-19 meeting, the Swiss firm said in its note.

It, however, warned that an earlier budget resolution, an acceleration in payroll growth and a sustained decline in 10-year yields (to 2.5%) could result in an earlier taper. UBS also highlighted a greater degree of a disruptive sell-off in equity markets in response to taper announcement, even as market participants may have discounted the warnings regarding a likely taper by the Fed.