US employment data are usually one of the biggest market-moving pieces of data. While employment is ultimately a lagging indicator of activity, its probably the single most important thing to policymakers. The December data were neither here nor there for markets, with the gain of 155k in the month on par with previous months, with the unemployment rate broadly unchanged at 7.8%. US employment growth is still too low and the unemployment too high for anyone's liking.
Surprisingly markets reacted more to the release of the FOMC minutes, which provides the gory details of discussions surrounding the last announcement on monetary policy. The additional purchases of longer-dated Treasury securities and the merits of providing numerical targets around what might trigger a rise in the Fed Funds rate seems to be understood by markets. But what caught them by surprise is the debate about when the current rate rate of purchases of securities will be slowed or come to an end. Bond yields jumped, equity markets slid and the US dollar rose.
I'm surprised that the market took this discussion as a hawkish sign. In some ways, the discussion of when to end assest purchases will be no different to the signals the Fed has given on when it will begin to think about tightening policy. It will more or less be dependant on how the economic outlook evolves. Those suggesting an earlier end to asset purchases may just be more bullish, which is not really a new thing.
There is perhaps also some concern about the costs and benefits of further purchases once the Central Bank's balance sheet reaches a certain size. But again this is hardly a new source of debate and has been an ongoing point of discussion since large scale asset purchases started.
Furthermore, the end of QE programs in the past have hardly been bearish for bonds in the past. At the end of QE1 and 2 bonds rallied strongly, confounding many. The key reason being that prospects for growth deteriorated on both occasions, with the US failing to generating any real momentum and the crisis in Europe also driving a flight to safety.
So while Fed speeches and commentary may create some ripples in markets, the big picture is all about how the data suggest economic activity is progressing. If the current status quo persists, the Fed is likely to remain dovish. This means it will be hard to bet against Treasuries, although there is no sense in being long now.
The implications of this for gold has been a talking point, but the yellow metal doesn't really seem to be doing anything different than it has been for the last 12 or so months. There is no sign that anything has changed in terms of our framework. The chart on the right shows gold continues to trade in the same band against the US dollar trade weighted index (TWI) as it has done for the last 12 months.
Many bulls are pointing to the break down in the supposed relationship between gold and central bank balance sheets and that this should for some reason converge. But to me this is irrelevant. Whats much more important is the interplay between debt and currency markets, which has caused enough confusion to make gold to hard to get excited about.
