SK: Market Recap: Fed’s Announcement Was Mostly Priced In
Much to markets expectations, the Fed announced today that it will purchase an additional $600 billion worth of Treasuries by the end of the second quarter next year. The purchases will be made in steps of $75 billion each month, and it will modify this policy if needed to best support higher employment and price stability. The Fed made a very cautious announcement, adopting an approach that is neither “shock-and-awe not very gradual but a convenient blend of the two. Announcing a total of $600 billion was intended to make impact and at the same time, purchasing $75 billion/month will leave them with the flexibility to change their approach if needed.
More purchases were announced even as Kansas City Fed President Thomas Hoenig expressed his dissent for the seventh straight session. Bernanke however, was left will little choice as the Fed’s most important aim right now is to reduce unemployment and increase inflation expectations. The Fed will face a lot of opposition from those who see high inflation as a result of excessive monetary easing, but avoiding deflation is more critical than high inflation at this time. The Fed decided to go with the lesser evil.
Fed’s announcement slightly exceeded average expectations of $500 billion, but the fact that markets hardly moved after the statement showed that it had already been priced in. In fact, stocks and Treasuries slid and the dollar weakened after the announcement, which could be because the $600 billion did not completely meet market expectations.
Interest Rates
Treasuries rose today but shed some of their gains after the Fed’s announcement to buy securities in the afternoon. The benchmark 10-Yr note gained slightly, pushing its yield 2 bp lower to 2.57%. The long Bond fell after the Fed said it will make only 4 percent of its purchases in the 17-30 year sector. The belly of the curve fell as the 5-Yr yield fell 5 bp to 1.11%. The 2-Yr note also gained as its yield fell slightly to 0.33%. With the Fed focusing on the 5-6 Yr securities, the yield curve will steepen as bonds in the far end of the spectrum sell off.
Inflation expectations, as seen by the breakeven between the 10-YR Treasury and 10-Yr inflation indexed securities (TIPS), fell by a basis point to 2.16%.
Stocks ended slightly higher but not as much as one would expect after the central bank announced that it will pump in $600 billion into the economy. The S&P advanced 0.4% and ended at 1197.96. NASDAQ gained 0.3% to 2540.27. The VIX Volatility Index fell considerably, shedding more than 9% to 19.56.
Dollar weakened after the announcement. The DXY index fell 0.4% to 76.347. Euro gained against the dollar to 1.4139. The British Pound gained slightly to 1.6081.
Gold spot price fell $8.90 to 1348.55. Crude price fell slightly to 76.347.
