Financial markets weakened as the FOMC minutes showed that some members proposed to end QE earlier than previously envisioned. Wall Street slipped with the DJIA and the S&P 500 indices losing -0.77% and -1.24% respectively. Commodities also declined as the USD climbed after the minutes. Investors were also concerned about the March 1 sequestration as well as potential increase in Saudi Arabia oil supply. The front month contract for WTI crude oil plummeted to a 1-month low of 94.21 before ending the day at 95.22, down -1.49% while the Brent crude contract fell -1.63%. The benchmark Comex gold remained weak after plunging -1.63% to the 6-month low on Wednesday.
The minutes for the January FOMC meeting indicated that policymakers were more upbeat on the US economic outlook as driven by improved business confidence and household consumption. They acknowledged better employment conditions but stressed that 'the recovery in the labor market was far from complete'. The debate on additional QE remained rigorous but balanced. The focus was on the benefits and costs of additional asset purchases. While some suggested asset purchases to end 'well before the end of 2013', others warned of the 'significant' costs of ending purchases prematurely. We anticipate the Fed to continue asset purchases through the end of 2013 but some tapering would be seen in 2H13. There were also discussions on the summary of economic projections (SEP). According to the minutes, it 'generally judged that the addition of the median of participants' projections could be useful to better illustrate the central outlook for the committee'. Furthermore, 'many participants' suggested exploring the 'potential for using the SEP to convey information about issues related to the Committee's future asset purchases and the Federal Reserve's balance sheet'.
The market is getting worried about the automatic federal budget cuts (“the sequester”) that would likely take effect on March 1 as the federal spending would be reduced by US$ 85B this year and US$1.2 trillion over 10 years. On the dataflow, housing starts dropped -64K to 890K in January, compared with consensus of a fall to 925K. Building permits climbed modestly higher to 925K in January from 903K a month ago. The market had anticipated a milder increase to 920K. Today, the government would release initial jobless claims probably rose to 361K in the week ended February 17 from 341K a week ago while Philly Fed index might have improved to 1.5 in February from -5.8 in January.
On oil inventory, the industry-sponsored API estimated that crude inventory added +3 mmb in the week ended February 15 while gasoline and distillate stocks fell -0.12 mmb and -1.6 mmb during the week. The report from the EIA/DOE probably showed a -2 mmb increase in crude inventory. For fuels, each of gasoline and distillate stockpile might have slipped -1.4 mmb during the week.
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