The Federal Reserve has spoken and the message seems pretty clear – unless the U.S. economy takes a turn for the worse the pace of money creation will be slowed before the year is out and it will be stopped by mid-2014.
That’s a fairly tight time frame, although interest rates won’t rise for some time after that, and it doesn’t take a crystal ball to see a further bout of market volatility is likely, centred again on emerging markets which could suffer big portfolio investment outflows as U.S. bond yields climb.
The markets certainly don’t seem confused, just alarmed. The German Bund future has plummeted by nearly a point and a half to its lowest point since February, mirroring the spike in U.S. Treasury yields. European stocks shed 1.5 percent at the start.
The good news, if anyone wakes up to it, is that the Fed must be increasingly sure that U.S. recovery is entrenched. Flash PMI surveys for the euro zone, Germany and France will give the latest snapshot of our region’s economic malaise and are unlikely to be as upbeat as the world’s largest economy.
There’s trouble in China too, where its PMI showed factory activity sliding to a nine-month low, increasing the chances of a sharp second quarter slowdown. Markets being what they are could view that as a cue for the PBOC to come in but either way it’s a gloomy report and in terms of sentiment, Bernanke has shifted the glass from half full to half empty.