The FOMC press release announced that the Fed is not doing anything different for this month.
The statement is pretty similar to that before and would be considered a disappointment to those that bought risk on the WSJ and NYT articles of last week.
So no new asset purchases, no removal of Interest on Excess Reserves.
The economic assessment was weak though- “the housing sector remains depressed.” is a knock against those that have said the housing market is turning.
Importantly and a bit surprising to me they did not change the guidance on the Fed Funds rate- it still remains at “exceptionally low levels for the federal funds rate at least through late 2014.”
This is important as I suggested to you that the fact the US Interest Yield curve will now flatten on this statement, it stops 5yr yields falling for the moment. That will in the end mean that the Implied Volatility levels on Interest Rates will start to rise again. And that means that Risk markets will be hit by this lack of movement by the Fed in the end.
But one phrase will help those risk bulls– “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” it’s a change from “may provide”. That opens up that if the economic news does weaken, as I expect, then the expectation of QE3 will grow again probably to fever pitch. It may well be why the equity market and commodity markets haven’t sold off yet. But the US$ is now strengthening with the Euro/US$ rate hitting the lows 1.22’s.
It will take maybe a day or two as we await the ECB, which I am pretty confident will follow a similar path. So no new news, but will open the possibility for action in the future. Is that enough for the risk markets, maybe, but then they will have to hope again.
So today, at the moment is a day for reflection- US Equities should weaken from here and so should commodities. Bonds and the US$ should rally. Whether that happens or not is anyone’s guess.
I still target 1.25% for US 10yr Treasuries in the next 6 weeks.
