A watched pot never boils – JP Morgan’s Stealey on tapering

Iain Stealey, PM, Global Multi-Sector Income Strategy at JP Morgan Asset Management warns against the attempt to decode every sign out of central banks.

It has been almost five months since the headlines started appearing that the US Federal Reserve was considering reducing its large scale asset purchases, more commonly known as quantitative easing (QE).

Since then, the use of the word “tapering” has become a daily occurrence within financial markets and, according to Google trends, is receiving quadruple the number of searches today compared to April. After all the discussion, debate (and googling) around the Fed’s next move, we finally think we will see some action, and we expect a reduction in purchases to be announced at next week’s FOMC meeting.

But is this Fed meeting set up to excite to disappoint? Since May, US Treasury 10yr yields have risen by over 1.25% indicating the market has already to a large extent priced in the tapering.

Yet equities continue to be buoyant, with the S&P 500 remaining less than 2% below its all time nominal high. The initial fear that was felt those five long months ago which saw equities fall over 5% has vanished.

The reason? Global economic data has been picking up and surprising to the upside and this is not just in the US. Six months ago in the UK we were discussing a triple dip recession yet the current PMI Services index is at levels not seen since 2006, while Q2 finally saw the eurozone pull itself out of recession.

Just as a watched pot never boils, trying to decode every utterance out of central banks has its limits. Investors need to see the wood through the trees. In this improving environment the Fed should be tapering, core government bond yields should be closer to 3% than 2% and risk assets should outperform. Allocations to high yield and corporate bonds with attractive spreads in a low default environment will continue to benefit portfolios. Looking ahead the focus will revert to traditional data watching and the extent to which better developed market data spills over into the emerging markets where we’re already sharpening our pencils for a buying opportunity.”

Read more from the team on JP Morgan Asset Management’s Global Fixed Income, Currency and Commodities blog.


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