Since Bernanke’s suggestion that QE may be tapered sooner than markets expected, equities have fallen, bond yields have risen and many commodities, particularly metals, have fallen off a cliff.
What can we expect from the minutes?
The statement following the meeting on June 19th said: “Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”
Markets read into this that the Fed was preparing to taper its QE program. The minutes might suggest markets were a little too eager to sell risk assets and that the committee may not be as confident about the recovery as it may have first appeared.
Last week’s statement by the new BOE Governor, Mark Carney, and Mario Draghi, the ECB’s president made clear that Central Bank policy will remain accomodative for a good while longer. The fact that both statements were made within two hours of each other provides clues that Central Banks believe co-ordinated action, with forward guidance, the first in the BoE’s history, is the most effective way to manage the market’s expectations.
If the minutes do indeeed suggest that tapering may not happen for a while longer, we could see another substantial rise in equity prices. Bond yields appear a little more resilient to recent policy statements which could suggest investors are beginning to hesitate to buy bonds on dips.
The outlook for bond returns has very likely now swung towards the bearish camp.