Taper tranquillity

The US Federal Reserve announced yesterday that it will begin to offload the corporate bonds that it bought as part of the quantitative easing programme. Far from panicking at the news, financial markets reacted with equanimity. The US dollar is unchanged on average.

It is fair to point out that the “Secondary Market Corporate Credit Facility”, to which the announcement relates, is only a tiny part of the whole QE package. Even so, there was remarkably little sign of the feared “taper tantrum” that afflicted credit markets eight years ago. Perhaps to take advantage of the moment, Philadelphia Fed President Patrick Harker said “it may be time to at least think about thinking about tapering” the $120 billion that the bank still spends each month on bonds and mortgage-backed securities.

The Fed’s Beige Book tended to support that idea, noting “a somewhat faster rate” of economic expansion in April and May. Rising costs, strengthening demand and labour shortages are not factors which obviously call for great monetary stimulus.

Houses still popular

Data from both ends of the earth pointed to a continued demand for residential property. In Britain the Bank of England’s Money and Credit report revealed 87k mortgage approvals going through in April. AiG’s Performance of Construction Index showed “strong construction activity in May”.

Alongside the new mortgage activity, the Bank of England also showed that people and companies are continuing to reduce their debt. Individuals made net repayments of £400 million in the month while large businesses paid back £4.8 billion. In Australia all four components of construction activity expanded strongly in May, with the index for employment hitting a record high.

Among the major currencies there was little to choose between the GBP, USD, JPY, CAD and NOK at the front of the field. The star performer was the South African rand, which strengthened by an average of 1.9%. Credit for that is apparently due to Anezka Christovova, an FX strategist at JP Morgan. She described the currency as “significantly undervalued” .

Jobs and PMIs

The main topics for the rest of the week will be services sector activity and North American employment. The services PMIs come out today, together with US jobless claims. There are employment reports on Friday from the United States and Canada.

Australia’s services sector reported “a record pace of hiring” and “a sustained expansion of business activity”. There were also steep increases in input and output prices. Other Australian data showed a larger trade surplus and a 1.1% increase in retail sales. This morning the UK services PMI is expected to be a point higher on the month at 61.8.

Today’s US weekly jobless claims are followed tomorrow by the far more weighty employment report, which includes the monthly change in nonfarm payrolls. After a disappointing 266k increase in April, analysts are looking for a 664k rise in May, with unemployment falling below 6% for the first time since March last year. At the same time a loss of 20k jobs is forecast for Canada, with unemployment ticking up to 8.2%.