Weekly Market Recap

Mr November

27/09/2021

Week in review

U.S. Federal Reserve hold rates, sets up tapering of QE
U.S. PMI manufacturing falls to 60.5
Eurozone PMI manufacturing falls to 58.7

Week ahead

Australia preliminary retail sales for August
Australia private sector credit for August
China PMI manufacturing for September

Thought of the week

The U.S. Fed Chair Powell gave the biggest hint yet that the tapering of its asset purchase program would begin later this year, most likely being announced in November. Based on an end point in the middle of 2022, this implies a reduction of $US15bn a month on the current $US120bn per month in purchases. If this transpires then the Fed’s balance sheet will have grown from approximately $US4tn to $US9tn in the space of two years. So what then? A reduction in the balance sheet would be too hawkish for the Fed which will be preparing the market for a normalisation in policy rates. Trying to adjust the balance sheet at the same time will only cloud what has to be a finely balanced message. Given all that has happened the Fed can only estimate what the correct size for the balance sheet might be and getting it wrong could be costly. This means that even when QE ends the Fed will still be buying bonds to maintain the balance sheet and restricting the rise in yields.

The Fed’s ballooning balance sheet

USD trillion

Source: U.S. Federal Reserve, J.P. Morgan Asset Management. Data reflect most recently available as of 23/09/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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