Damned if they do, damned if they don't

The FTSE 100 is now back to the top end of its trading range, but having got there, the index seemed to get a touch of altitude sickness and drifted back. One driver of equity markets in the past few weeks has been a constant flow of deals. Since the start of 2014 over $130bn of deals have been announced, the latest being Actavis acquisition of Forest Laboratories. One would anticipate as the year continues to progress that this provides positive support for equities. 

The economic news on Wednesday is dominated by the unemployment report and the minutes from the Federal Reserve and the UK's MPC. Wednesday's UK unemployment report showed a 0.1% rise from the previous month, not in my view entirely surprising after the winter weather and the faster than anticipated fall. The MPC minutes was unlikely to give any new insights after last week's report from the Bank of England. All members of the MPC appear unified on the views expressed last week by Mark Carney. Rates will remain where they are and when they do start to rise, the rise will be modest. 

The more interesting revelations could have come from the Fed. At the time of the Fed’s meeting there was some debate as to whether the Federal Reserve may, in the face of the emerging market concerns, suspend the intended $10bn. As it transpired the central bankers of the US and UK seem to be singing from the same song sheet. Rates will stay low whilst inflation remains below their target. 

The recent data from the US has generally been a tad disappointing. The weaker data has been pretty much across the board with weak hiring numbers across December and January, and disappointing housing data, while one ray of sunshine was Friday's Michigan consumer confidence report. At the next Fed meeting in a couple of weeks time, if the data does not show signs of picking up, the committee may be faced once again with the dilemma of whether to taper by another $10bn. If they do decide to hold back, it may not send a confident signal to the markets about the sustainability of the recovery. It may be a case in the short term of damned if they do and damned if they don't. That may be why the Vix has climbed back over 15.

The next US unemployment data is released on March the 7th. I am willing to bet that number, in a similar way to the UK's number today, will move away rather than closer to the Federal Reserve's target of 6.5%.

Posted on February 20, 2014 .