Twist, Stick or Bust?

Sep 22 • Between the lines • 2252 Views • Comments Off on Twist, Stick or Bust?

As predicted the Fed, in the form of Ben Bernanke, announced the next phase of the Fed’s policy in the latest attempt to hold off a double dip recession. Overall the narrative lacked the dynamism and the policy lacked the ingenuity many commentators were expecting. Beyond that already pre-announced, in the form of quasi ‘leaks’ to the financial press and markets, the FOMC announcement offered little in the way of confidence and perhaps indicated that the Fed is finally scraping the bottom of the barrel for ideas. As a consequence the USA markets collapsed vigorously in late trading.

Federal Reserve policy makers will replace much of the short-term debt in their portfolio with longer-term Treasuries in an effort to reduce borrowing costs and in a desperate hope to keep the economy from relapsing into a recession.

The central bank will buy $400 billion of bonds with maturities of six to thirty years through June, while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after their intensive two-day meeting. The action “should put downward premaybe a poublishssure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC stated.

Other than ‘stimulus’ directive the Fed announced there’d be no adjustment in the base interest rate. One interesting stat. that Bernanke mentioned in July was another dismal unemployment figure; “Importantly, nearly half of those currently unemployed have been out of work for more than six months, by far the highest ratio in the post-World War II period, long-term unemployment reduces the productive potential of our economy as a whole.” Bernanke and his colleagues have a dual congressional mandate to achieve stability and create maximum employment, as such they’re renewing their attempts to reduce the 9.1 percent joblessness figure that’s crept up 0.3 points since March. The unemployment rate reached a 26-year high of 10.1 percent in October 2009.

Stocks actually tumbled after the Federal Reserve said there were “significant downside risks” to the economy even as it takes more steps to boost growth. The SPX closed down the most in a month, losing 2.9% to 1,166.76 at the close in New York, extending a three day drop of 4.1%.

Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail; “Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks. While Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.” Pimco is the world’s largest bond-fund manager. As to what more Bernanke can flesh out of his ‘twist’ initiative remains to be seen.

The austerity measures already announced by Greek officials took their own twist in late afternoon Europe central time. The latest raft of added conditions are breathtaking, so much so that the powerful labor unions and public transport workers announced immediate strikes starting on Thursday in opposition to the measures.

 

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The cabinet will cut pensions amounting to more than 1,200 euros a month by 20 percent and further reduce payments for former state workers who had retired before the age of 55. It will extend a new real estate tax hike until at least 2014. It will also put 30,000 civil servants in “labor reserve”, whilst reducing their pay to 60 percent and give them 12 months to find new work in the state sector, or they’ll simply lose their jobs. Ominously youth unemployment is now at 40% in Greece, anecdotal evidence suggests the figure may be as high as 60% in less industrialised areas. Overall levels of unemployment are circa 25%.

European indices started the day in positive territory, but weighed down by the Fed’s lack of optimism stocks fell in the latter parts of the afternoon session. The DAX closed down by 2.47%, the STOXX closed down 1.96%, the CAC by 1.62% and the FTSE closed down 1.4%. The mood for London opening is negative, the daily future currently down circa 1.5%. Brent crude is down $135 a barrel and gold is flat. The Euro fell sharply in a correlated move with the leading USA indices, naturally the Swiss franc moved up versus the dollar. Cable also fell sharply as USA investors moved into dollars.

Data publications that may affect the London and European open.

09:00 Eurozone – PMI Manufacturing Sept
09:00 Eurozone – PMI Services Sept
10:00 Eurozone – Industrial New Orders July
11:00 UK – CBI Distributive Trades Survey Sept

The Eurozone PMI data releases could affect sentiment. However, once again there are currently far bigger macro economic stories stalking the Eurozone area that will affect the markets.

 

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