Macro Weekly: Let’s get it over and done with

by: Han de Jong , Nick Kounis , Georgette Boele , Roy Teo

Macro Weekly - 16 December 2013 - Let's get it over and done with ()
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  • Big Picture: This is our last Weekly for the year. But the title refers to the Fed, not the calendar year – nor our Weekly. It is a close call whether or not the FOMC will start the tapering of its asset purchases at this week’s meeting. It would be wise in our view for the Fed to provide some more clarity on how and when it wants to proceed. If not, uncertainty will persist, which will likely prove bad for the real economy and for markets. On balance, we are not convinced that tapering will start in the very short term, but we do think that the Fed will create more clarity, perhaps by laying out some sort of a credible path to tapering.
  • Rates: We think that bond markets have largely adjusted to the idea of tapering. Treasury yields are now not too far away from the levels seen just before the September FOMC, when the Fed was widely expected to taper. Furthermore, the experience of past QE periods suggests that the market adjustment happened in the run-up to – rather than during – the programme. So although we see a further steepening of yield curves during the course of next year as the economy strengthens, in the near term, we think that the tapering story has to a large extent been digested.
  • FX: The crucial event last week was the US budget deal. Sentiment changed from the moment the deal was announced. The market became more nervous about a possible Fed tapering this week and this supported the US dollar versus most currencies. A no change decision by the Federal Reserve this week could hurt the US dollar, but communication setting out a path to tapering would likely cushion the blow. Meanwhile, the resilience of the euro continued to be driven by tighter liquidity conditions in the money market. But its fortunes should turn in before long, not least because tighter financial conditions could trigger an ECB response.