Given the very mixed opinions on what may come out of the FOMC meeting, some people were bound to be surprised by today’s decision to cut back QE asset purchases by $10 billion per month to $75 billion starting in January, taking $ 5 billion away from both government bonds and mortgage backed securities. Stock markets have surged on the news with traders taking early tapering as a sign of an improving economy (strong economies don’t need QE support). Hints from Chairman Bernanke at his press conference that this could be the first in a series of taperings also appears to have inspired confidence but it remains possible that the Fed may pause along the way to monitor the effect on the economy, particularly inflation after members lowered forecasts. This euphoria may boost stocks in the short term, having already sent some US indices to test their all time highs, but may not be sustainable. While this rally may create some optimism heading into the holiday period and the beginning of 2014, the reduction of new money coming into the markets could start to drag on stocks as we move deeper into next year. On the interim momentum has turned decidedly positive heading into today’s Asia Pacific trading session. FX markets have been quite active in the wake of the FOMC decision. It appears that the street is seeing the immediate taper decision as the start of a movement from dovish toward more neutral or even hawkish central banks. After a slow start, USD has been steadily gaining strength in the hours following the announcement. The top performing currencies (fallen the least against a resurgent greenback) following the decision have been those who a tapering Fed may give cover for their own tightening moves. NZD, where the RBNZ has already indicated its intention to increase interest rates to combat inflation, and GBP where an accelerating economy may encourage the Bank of England to move up its timetable for tightening following a strong employment report that brought the unemployment rate to within 0.4% of the Bank’s 7.0% threshold for action. NZ GDP beat the street adding more fuel to the case for a rate hike next year. AUD continues to decline following recent indications that the RBA may yet cut interest rates if needed. It looks like RBA Governor Stevens may get his wish for a lower dollar even after backing away from imminent FX market intervention. On the other hand, JPY, which now has the most dovish among the world’s major central banks, has been knocked to the bottom of the league as USDJPY broke out to a new multi-year high today. CAD has also weakened dramatically with the policy difference between the two countries narrowing. Gold and silver dropped back a bit but held above their 52-week lows and did not break down further. This support suggests that the selloffs of recent months have already priced in Fed tapering and that bears may have been fully washed out already. Economic News Highlights of overnight announcements include: NZ GDP 3.5% street 3.4% vs previous 2.5% US interest rate 0.25% no change expected QE3 total purchases $75 billion per month cut from $85 billion FOMC member projections 2013 GDP raised to 2.2-2.3% from 2.0-2.3% 2014 GDP widened to 2.8-3.2% from 2.9-3.1% 2013 unemployment rate lowered to 7.0-7.1% from 7.1-7.3% 2014 unemployment rate lowered to 6.3-6.6% from 6.4-6.8% 2013 PCE inflation lowered to 0.9-1.0% from 1.1-1.2% 2014 PCE inflation 1.4-1.6% vs previous 1.3-1.8% Member guesses on first rate increase 2014 2 2015 12 2016 3 US Markit flash service PMI 56.0 vs previous 55.9 US housing starts 873K vs street 954K US building permits 1,091K vs street 990K US crude oil inventories street (3.0 mmbbls) US gasoline inventories street 1.5 mmbbls UK jobless claims (36K) vs street (35K) vs previous (41K) UK unemployment rate 7.4% vs street 7.6% UK 3M employment change 250K vs street 165K vs previous 177K Germany IFO bus climate 109.5 as expected Germany IFO current 111.6 vs street 112.5 Germany IFO expectations 107.4 vs street 106.5 Upcoming significant announcements include: 9:30 am GMT UK retail sales street 2.2% vs previous 1.8% 8:30 am EST US jobless claims street 335K 10:00 am EST US Philly Fed street 10.0 vs previous 6.5 10:00 am EST US existing home sales street 5.02M 10:00 am EST US leading indicator street 0.7% 10:30 am EST US natural gas street (264 BCF)