The market sentiment is expected to be well-contained by the next meeting of the Fed while investors now are separated between having a first cut of its USD85B monthly purchasing of mortgage backed securities and US treasuries or keeping it as it is for longer time as there is still a need for supporting the US labor market after US labor report of August has come showing less than expected number of added jobs out of the farming sector by 169k while it was foreseen to be 180k and also strong downside revision of July reading to be 104k from 162k in the first reading.
There is no inflation pressure also to push the Fed forward for tightening its QE policy. Jul PCE was at 1.4% yearly and this is the highest rate of it could be reached since last November while the Fed target of this favorite indicator to gauge the inflation is at 2% yearly and it has mentioned several times in its recent meetings that it has a tolerance for half a percent more than this rate however we have seen in the recent months continuous rising of this rate from 0.7% in April and we have to wait this week by the Fed’s meeting for August CPI which has shown also rising in the recent months to reach 2% in July from 1.1% in last April.
So, both of the inflation and the growth which are expected to be revised by the Fed are indicating that the pace of ending this policy will be gradual for giving the longest possible period of stimulating the economy while there are still doubts about what could be reached in the congress about hiking the debt ceiling from the current $16.7 trillion as it is concluded that the republicans will push for further governmental spending cuts and these more cuts can have negative on the economy which is still trying to get over last march deployed sequestrations which are imposed to save this year by USD85B to be continued yearly for 9 years to reach about $1.2 trillion By God’s will.
The new treasury’s secretary Lew has sent the congress a letter recently to call it for reaching an agreement about that issue for avoiding default again as the cash which is expected to be in the government hand in the middle of next October will be $50M only to fulfill the governmental obligations and surely, the Fed is in need to know what will be reached and it can give the market this message by any way to have more time to watch the end of the negations about the debt after it had called the law makers nearly after all of its meetings this year by Bernanke for working for solving the debt problems for giving stability to the financial situation and the economy over the long term.
The Fed has already pumped cheap money into the nerves of the economy to stimulate it and this has added more than $3 trillion to its balance sheet and you can see now the impact of this money on the economy and how the equities market this year could surpass as October 2007 highs reaching new highs from 1st March 2009 lows after the credit crisis.
You can see also that the economy is in better shape giving good indication with US ISM non-manufacturing index rising to its highest value of expansion above 50 since Feb 2011 to 58.6 in August which had also the highest expansion value of ISM manufacturing index to rise to 55.7 which is the highest since April 2011.
So, the door to cut the QE is not closed but it is not also wide opened in front of the Fed.
Kind Regards
FX Market Strategist
Walid Salah El Din
Mob: +20 12 2465 9143
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