SINGAPORE, SINGAPORE -- (Marketwired) -- 08/06/13 -- In FXPRIMUS' Market Brief of The Week for 5 August, the brokerage firm's Senior Economist, Jimmy Zhu, highlights disappointing labor data and its effect on quantitative easing (QE) tapering confidence.
Last Friday's Non-Farm Payroll (NFP) expresses another view compared to Institute for Supply Management (ISM) and Automatic Data Processing (ADP)
The tapering sentiment dominated the entire busy week. The Dollar took the initiative and reversed the recent downtrend when bets rose on Federal Reserve (Fed) tapering as soon as the next Federal Open Market Committee (FOMC) meeting, fuelled by the ADP and Gross Domestic Product (GDP) releases earlier this week. However, a slightly dovish statement from the FOMC suggested that tapering in six weeks looks unreasonable, due to inflation concern, moderate to modest growth and higher Mortgage rates.
Given the average weekly jobless claims, and the ADP in July being nearly the same compared to June, the NFP was supposed to outperform. However, the actual result disappointed the market and "QE (Quantitative Easing) fans" celebrated the party.
"It looks like there will be a higher chance in December since various "uncertainties" still exist. I've held this view since May," said Jimmy Zhu, FXPRIMUS Senior Economist.
The market adds bets on September due to improving data; there's nothing wrong with that.
"But I think the data itself tells us that the Fed is ready to taper within the year," said Jimmy Zhu. "However, they may not do it earlier because the recent labor market growth just meets the Fed's expectation," he said.
-- Growth in the Labor market hasn't exceeded the Fed's forecast yet - In the past 12 months, the average NFP grew 191k per month, pushing the unemployment rate down by 0.6%. The Fed's current projection for the unemployment rate is to reach 7% from the current 7.6% by the middle of 2014. With that said, things happening now are not beyond the Fed's expectation.-- Recovery sustainability concern - U.S. Treasuries seem very sensitive to policy outlook. A rising yield increases long-term borrowing costs and mortgage rates, dampening housing activities. After the FOMC meeting on 18June, U.S. equities retraced lower by 5% before Ben Bernanke appeared "dovish." "I expect a similar reaction after tapering. Thus, the Fed will be cautious," said Jimmy Zhu.-- No press conference in October - No verbal communication increases the risk of "misunderstanding." "I believe the Fed is very aware of this," he said.-- Chairman or Chairwoman - The outcome may only be released at the end of September. The Fed will likely make any "policy adjustment" after a candidate is nominated.
No worries on Dollar if tapering doesn't occur in September
Said Jimmy Zhu, "Some 'knee jerk' reactions for the Greenback selling-off might be expected. However, I think the Dollar might perform better and stay in a more sustainable uptrend this year if the Fed chooses not to taper in September, for the reasons below: