yields resulting from the tapering of stimulus by the Fed.
New Home Sales performed marginally better, holding its
ground until the end of the second quarter at 450,000 units,
but it too would decline and was reported at 421,000 units in
August.
US treasuries continue to trend upwards on expectations
that federal stimulus will be withdrawn as the US economy
improves. Changes are especially apparent on the long end
of the curve with the 30 year treasuries increasing by 58
basis points between March and September. Undoubtedly,
the decision on whether or not to end the Federal Reserve’s
quantitative easing program has been the key issue for
market watchers. The Fed has so far resisted ending the
program noting that it wanted more evidence of growth first.
Chairman Bernanke had in March suggested that the FOMC
wished to conclude the asset purchase program when the
unemployment rate reached 7.0% and had previously noted
that the tapering was not expected until around the middle
of 2014. As such, the fed funds rate target remains between
0% to 0.25% and the Fed will keep its monthly purchases
at USD85 billion. Specifically, the purchases will involve
treasuries to the value of USD45 billion per month and
mortgage bonds to the value of USD40 billion per month.
With Chairman Bernanke demitting office early next year,
Janet Yellen is currently on track to take his place. Yellen has
stated that while the Fed would not withdraw stimulus too
soon and that the economy was performing below potential,
she did not see QE lasting indefinitely.
The other major development in the United States during
the last six months was the debacle of the federal budget
impasse and US borrowing limit. In October, the Congress
failed to resolve a deadlock over support for a federal budget.
As a result, the U.S. Government was forced to begin
shutting down certain non-essential services on 1 October. A
temporary solution was finally arrived at on 17 October with
the new bill allowing the U.S. federal government to continue
meeting its obligations until 15 January 2014, while extending
the debt limit to February 2014.
Notwithstanding the federal shutdown there were positive
signals for the United States during the period of review. On
10 June 2013, Standard and Poor’s Rating Services revised
the outlook on its long-term rating of the United States of
America to “Stable” from “Negative” while affirming its
‘AA+/A-1+’ credit rating on the US. S&P believes that the
US dollar will maintain its long-established position as the
world’s leading reserve currency, given the country’s ability
and willingness of the monetary authorities to support
sustainable economic growth and to mitigate major economic
and financial shocks.
Figure 1
Real GDP Growth (%)
Source: Bloomberg
Figure 2
Labor Market Indicators (%)
Source: Bloomberg
Figure 3
US Treasury Curves (%)
4
3.5
3
2.5
2
1.5
1
0.5
0
Source: Bloomberg
9