Fed meeting finally here, tapering to remain elusive though

• FOMC meeting due at 7pm with Bernanke speech at 7.30pm
• UK inflation lower in November ahead of jobs and wage data
• Japanese November trade deficit the largest on record.

Markets are somewhat confused as to what they think about tonight’s Federal Reserve meeting and it is showing in the price action overnight. A decision will, in all likelihood, not bring any further clarity of price movements moving into the New Year unless the Fed decides to once again surprise the market with something drastic. The big dovish and hawkish risks are that we see no taper and no language supporting an increased likelihood of a stimulus reduction or, on the other hand, some form of reduction in asset purchases and a calendar looking forward as to when additional cuts will be made. We view these as outside possibilities.

We think that there is a middle ground that the Fed will be happy to occupy which will see no tapering of stimulus,  but recent data improvements will leave them with no choice to signal that it is coming at either the January or March meetings. This would likely see an initial dollar slip followed by strength as the market became more confident of an eventual start to stimulus reduction in the New Year. The meeting takes place at 7pm GMT with Bernanke speaking at 7.30pm. We would have to expect that markets will remain slightly skittish in the run-up to the meeting.

Before the Fed, risks come in the form of the latest Bank of England minutes and UK unemployment. Unemployment is unlikely to have moved lower from the decline to 7.6% last month and another month at that level may act as a disappointment for those economists tripping over each other to upgrade their forecasts for the UK. Yesterday’s inflation numbers acted as a slight disappointment for GBP watchers. The rate of inflation continued to fall (2.1% from 2.2% previously) in November, coming ever closer to the Bank of England’s 2% target, the first time it has been this close in 48 months.

Continual falls in energy and food prices seem to remain the main drivers – oil price falls were the main driver of the 1.0% slip seen in factory gate prices compared to this time last year. This good news may not last too long however, given the increase in utility costs that are to hit the basket next month courtesy of recent price rises by energy providers.

That being said, we are not worried about large bouts of disinflation or deflation in the UK, unlike some analysts are for Europe moving forward. While this lower CPI is good news in the short term, it can only really be justified as encouraging if today’s wage data starts to increase as well.

Eurozone inflation continued to fall 0.1% from the previous month with core inflation down to 0.9% on the year. Price pressures, or the lack thereof, will remain a real issue for the ECB moving into 2014  and we are concerned that the European Central Bank will have to resort to extraordinary measures in order to stave off further economic pain.

Overnight we have seen Japan report its largest trade deficit ever for the month of November. Imports rose by 21.1% on the month as domestic demand strengthened ahead of the enforced increase in Japan’s sales taxes in April 2014. Exports were higher than this time last year as well with a rebound seen in sales to China following a relative calming of tensions surrounding the Senkaku Islands. This combined with a likely increase in quantitative easing by the Bank of Japan in the early part of 2014 should help contribute to a weaker JPY. Yen is weaker on the session so far this morning.

European news comes in the form of German IFO and should follow the stronger than expected ZEW reading yesterday by pointing to further German economic sentiment improvements.

Have a great day

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