More Fed Members Ready to Take Action

Earlier this month we saw the hawks at the Bank of England throwing the towel, & today the FOMC minutes revealed the hawks losing ground to the doves hinting at more easing measures. NZD, AUD and JPY led the market; GBP and CHF were the laggards. The Asia-Pac session features Japanese industrial production and NZ business confidence.

The differing opinions in the minutes were expected due to three voters dissenting but what came as a surprise was that "a few members"members favoured a more substantial move than just keeping the Fed funds rate exceptionally low through mid-2013.

The dovish talk heightened anticipation about QE3 and other policy action. The USD fell after the minutes and precious metals were the big winners. Gold gained $49 to $1804 and silver rose 2% to $41.43.

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FOMC voters in the opposite camps also appeared on Tuesday. Evans said he favours "aggressive" policy accommodation. Kocherlakota said he "doesn't believe" in further action unless disinflation returns.

The consensus is shifting toward action at the Sept. 21 FOMC meeting with JPMorgan joining Goldman Sachs saying that a portfolio duration extension is the most likely outcome.

Sentiment data from August continues to be stunningly weak. Consumer confidence hit a two-year low in August, down to 44.5 from 59.2 in July and much worse than the 52.0 expected. Expectations for the next 6 months fell a massive 23 points to 51.9.

Hard data on US economic performance for August has not been released but if it’s anywhere near as bad as consumer and manufacturing sentiment THE TONE IN MARKETS WILL SHIFT COMPLETELY. The test begins tomorrow with ADP jobs data followed by ISM manufacturing Thursday and non-farm payrolls on Friday.

S&P 500 closed up 0.2% to 1213 but fell 7 points in the last five minutes of trading. The index has gained in six of the past seven sessions and the highs on Tuesday were just shy of the 50% retracement of the fall from the August highs.

Asia-Pacific Preview

At 2350 GMT Japanese industrial production for July is expected to rise 1.6% after a 3.8% climb the month before. In year-over-year terms, production is expected down 1.9%, showing that most of the impact of the earthquake is behind us. Yesterday’s retail sales report easily beat expectations and another beat in this report suggests some upside in Japanese economic performance.

The other report to watch is NZ business confidence at 0100 GMT. There is no prior but the prior was 47.6. We think NZD is vulnerable here after a nine-day run up and a soft reading here along with a change in risk sentiment could lead to a swift selloff.