Sentiment is mixed this morning after yesterday’s FOMC meeting in which the Fed extended its program dubbed “Operation Twist” through 2012, lowered forecasts for 2012 and 2013 U.S. GDP, and said unemployment will remain high throughout this year. EU stock indices are mostly lower, while most sovereign debt spreads to bunds are tighter in that area, led by Spain and France after successful debt auctions.
Officials at the Fed decided to extend “Operation Twist” by allowing for another $267B in longer-term debt purchases to replace short-term bonds throughout the rest of the year. They cut their estimates for 2012 growth after a slowdown in hiring last month, and they see little progress being made on unemployment the rest of the year. Their central tendency estimate for 2012 GDP was lowered from 2.4%-2.9% in April to 1.9%-2.4%. Seven FOMC participants said the first interest rate increase would occur in 2014, while six said it would occur in 2015. Inflation expectations remain muted, especially with oil prices remaining at their current depressed levels. The continuation of the program, known as Operation Twist, “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said yesterday in Washington.
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Sentiment is waning this morning as Investors are becoming more cautious before the FOMC meeting today and amid fading optimism that a crisis in Europe has somehow been averted. U.S. Treasury yields traded in a narrow band between -0.4bps and +1.9bps overnight, while German bund yields climbed significantly higher led by the 10yr up +5.6bps; sovereign yield spreads to the bund are tighter across most of Europe. S&P 500 futures as well as EU equity indices are mostly modestly higher this morning, the FX markets are remaining relatively quiet, and commodities are reasonably lower. A survey of U.S. primary dealers shows no consensus for the FOMC meeting, while a survey of economists clearly points to another round of duration extension operations, OT2 (Operation Twist 2). The rate decision is due out around 12:30pm EST, followed by Fed Funds projections at 2pm, and Bernanke’s press conference at 2:15pm.
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Sentiment is optimistic this morning with most stock indices higher, bund yields moving higher, most euro-zone sovereign spreads to bunds are tighter, and risky FX moving stronger. U.S. futures are pointing to a higher open, the USD is experiencing weakness, and Treasury yields are mixed in very modest ranges, from -0.5bps to +0.6bps. Industrial commodities including copper, aluminum, and energy are mostly lower, while gold and silver are moving higher on possible expectations for Fed easing, and is consistent with USD weakness.
The elections held Sunday helped allay fears of an imminent departure of Greece from the euro-zone, but accomplished little else. Yesterday, Angela Merkel made it clear that any new government formed must be able to stick with the current rescue commitments and said that “there can be no loosening on the reform steps.”
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