MARKET MOVER - BNP PARIBAS - Investment Services India

Market Outlook
Fed opens the door to
more stimulus…
…as it fails to deliver on its
mandated objectives
The outcome of the FOMC meeting pretty much matched our expectations,
with the Fed opening the door to “additional accommodation if needed” to
“support the economic recovery” and “return inflation, over time, to levels
consistent with its mandate”. This formalised the bias to ease which had
been laid out in Chairman Bernanke’s speech at Jackson Hole.
We had suggested prior to the FOMC meeting that failure to deliver on its
dual mandate of price stability and maximum sustainable employment would
figure prominently in the Fed’s thinking and so it proved. The change in the
language in the statement with regard to inflation was particularly striking. To
quote: "Measures of underlying inflation are currently at levels somewhat
below those the Committee judges most consistent, over the longer run, with
its mandate to promote maximum employment and price stability”.
If the data continue to paint a picture of sub-par growth, the Fed will continue
to fail to achieve its mandated objectives and additional accommodation will
be required. The bar for action, therefore, is set low: more of the same will
be sufficient to prompt the next phase of balance sheet expansion – which
we continue to believe is most probable at the November FOMC meeting. A
marked improvement in incoming data will be required to forestall the Fed
taking such action.
70
65
60
55
50
45
40
35
30
25
US ISM: Downside Risk?
Manufacturing ISM:
New Orders less Inventories (RHS)
ISM Manufacturing:
Headline
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
30
25
20
15
10
5
0
-5
-10
-15
-20
Source: Reuters EcoWin Pro
Weaker ISM to boost the
case for action
The next key staging post in the assessment of the data is the upcoming run
of business surveys for September, including the ISM for manufacturing at
the end of next week. Our expectation is for a downward surprise relative to
market consensus expectations: we see the headline index forecast sliding
to around 53, its lowest level since early 2009. The gap between the subindices
for new orders and inventories, usually a good leading indicator of
the ‘headline’ ISM index, is pointing to considerable downside potential for
the latter (see chart).
In between times, durable goods orders are likely to have fallen sharply in
August, driven by a drop in aircraft orders. Stripping out the transport sector,
we forecast that orders will rebound but the underlying trend in the ‘core’
data remains weak, indicative of a slowdown in business investment – one of
the better-performing areas of the economy recently.
Ken Wattret 23 September 2010
Market Mover
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