John Briggs, Head of Cross Asset Strategy, RBS, analyzes the impact of the Fed’s action to hold off from their ‘tapering’ action.

Federal Reserve Fed

Cross asset research is the analysis of the impact of significant events on different types of asset classes, the interconnecting links between them and the formulation thereafter of an integrated view.

Fed controlling rising interest rates

The analyst’s opinion is that the main reason the Fed did not put a brake on QE3 was to control rising market interest rates.

A Week Hence: Yields

10-year yields are down 20bps, while the conforming 30-year mortgage rate has fallen from 4.75 percent last week to 4.62 percent. How much of this percolated to consumers, given that refinance departments in many banks are being downsized, and that only about 20 percent of the Agency MBS market can really be refinanced? Not much, says the analyst, who also notes that the primary/secondary spread has moved up from 98bps to 115bps.

Equities

Equities were up 21.4 percent prior to the Fed, and are +20.9 percent a week later.

USD

The U.S. Dollar Index (DXY) is down only 1 percent post Fed.

Housing Market

Home prices climbed 0.6 percent in July, according to the S&P/Case-Shiller composite index of 20 metropolitan areas. Compared to a year earlier, prices were up 12.4 percent.

Conclusions

The analyst is of the opinion that considering the low-key impact of the non-taper, the Fed may well have gone ahead and taken the bull by the horns. Besides this, the tapering rhetoric, by way of forward guidance, may also be ineffective given the conflicting remarks being issued by various Fed speakers. The fact that the top job in the Fed is in transition, is another source of market uncertainty.