More Moderate Taper Possible
While we maintain our view that the US Federal Reserve will announce that it is beginning to taper its current quantitative easing programme (QE3) at its upcoming September 17-18 meeting , a few disappointing data points have cooled market expectations. Weak nonfarm payroll numb ers for August released on September 6 have increased the possibility that the taper announcement after the Fed meeting will be somewhat more modest than was initially expected . A below-consensus consumer confidence number released on September 13 will likely only compound the recent retracement seen in US bond yields . Since the release of the poor payroll figure, t he generic 10-year US government bond yield has come back after nearly hitting 3.0% on September 5, holding to support and trending toward a fairly strong resistance line.
Similarly, the December 2014 and 2015 euro dollar contracts have retraced over the same period, as markets have begun to price in the possibility of a more gradual end to QE3 and transition to rate hikes than was thought likely at the start of the month . A relatively dovish tapering announcement could see these instruments come back further to resistance and bond yields continue to fall.
That said, we acknowledge the possibility that the market could be caught off guard by the announcement of a relatively more aggressive taper timeline. By all accounts, the US economy is healthier than when QE3 was implemented in September 2012, and even stronger than when the Fed discussed tapering the programme in May. Furthermore, many Fed officials have stated that they would not be swayed by one month's worth of data , suggesti ng there may be appetite among board members to discount the weak jobs and consumer confidence data from August and opt for a more rapid winding down of monetary stimulus . Such a move by the Fed would likely push 10-year yields through short-term support and lead to a re-testing of the 3.0% level , with a concomitant sell-off in t he euro dollar contracts .
|Retracing Slightly On Weak Data|
|US - Generic US Government 10-Year Bond Yield, %|