US fixed income and stock markets are preparing to lose cushion as Fed may announce the onset of balance-sheet cut at the meeting on Wednesday. Termination of reinvestment policy and a smooth shedding of securities means a complete switching off of the "rescue mode” which has been regulator’s state for about a decade.
The market practically rules out the possibility of a rate change in September, but the chances of a rise in December rose to 52% last week.
The initial rate of liquidity withdrawal from the economy is estimated at $ 10 billion / month, each quarter will increase until the monthly sales reaches $ 50 billion. At such rates in the first twelve months, the Fed will offer $ 300 billion in bonds to the market and about $ 500 billion in second year. Bonds with what maturity date will go first is still unclear.
In its program, the Fed will undoubtedly take into account past failures of its colleagues, where withdrawal aftermath was a rough going. For example, the five-year incentive program in Japan ended in 2001 to 2006, which forced the Bank of Japan to restore purchases, and after a two-fold increase in the ECB rates in 2011, they were followed by a rollback, with the announcement in 2015.
The growth of due to the devaluation of the dollar over the past few months helped the US currency to spend a week on a positive note, but the situation with the primary drivers of growth was disappointing. Retail sales slowed in August, so optimism on the US currency quickly came to naught. There are no data that underline the strong growth of consumption, so the revelations of the on the decision in December should not be expected in the absence of clear signals.
Too early to enjoy
The revival of shale drilling in the United States, together with restart of the main refineries pose a major threat to oil prices. The growth of WTI last week to $50 per barrel was obviously dependent on short-term factors, which will gradually disappear. The forecasts of OPEC and the IEA on increasing demand improved the information background but nothing more. The alarm signal came from CFTC data, which showed that the net position of hedge funds in the week ending Dec. 12 declined. Further dynamics will depend on the news about rebound of the refineries’ operation.
The long-awaited sign of stabilization
Housing prices in China have grown at a minimum pace for seven months due to effective efforts of the Chinese government which cooled the economy. Despite tough measures to reduce credit dependence of the economy real estate market surprisingly shows signs of stability without major prices pullback. Leveling off of prices allows expecting that tightening of the credit policy by authorities will pass less intensively, which is a good signal for local stock markets and for the rest of the world, perceiving the situation in China as a significant external risk.
This analysis is provided as general market commentary and does not constitute investment advice.