By Greg Peel
The Dow closed down 3 points, while the S&P was flat at 1428 and the Nasdaq fell 0.3%.
The US economy is continuing to grow at a "moderate" pace, the Fed monetary policy statement declared last night, weather disruptions not withstanding. Little has effectively changed in the Fed's view on the economy since September, with last night's updated forecasts for 2013 GDP growth (2.0-3.2%) and unemployment (6.9-7.8%) not representing any real adjustment. However "moderate" is not enough, so the Fed has decided to chuck another lazy trill the economy's way.
The Fed will expand its asset purchase program by US$1 trillion in 2013 to US$4 trillion with the inclusion of fresh Treasury bond purchases at the rate of US$45bn per month. These naked purchases replace the expiring Operation Twist, which saw long-date buying offset by short-date selling, and accompany the program announced in September to buy US$40bn per month of mortgage-backed securities (QE3).
The Fed also introduced a new system of targets for when its zero interest rate policy will be reassessed. The FOMC has for some months discussed the possibility of replacing a time target (currently mid-2015) with targets linked to economic data, and last night it did so. The Fed funds rate will remain ultra-low until unemployment falls below 6.5%, or if core inflation (not including volatile food and energy prices) rises above 2.5%. On the Fed's current projections, unemployment is expected to reach the 6.5% target by mid-2015, suggesting not much has really changed. Inflation is not expected to hit the 2.5% level in the period, but the Fed is providing a safety valve just in case.
There was an initial "woohoo!" response from Wall Street, which took the Dow from flat before the announcement to up 80 points in a blink. It is most likely that the jump represented computers falling into an upward hole nevertheless, given a US$45bn/month QE4 program was exactly what Wall Street was expecting, and given that since QE began in 2009 the novelty has worn somewhat thin. The Dow and other indices peaked out and rather quickly retreated. Despite Wall Street's recent slow graft back towards the 2012 high, Cliff concerns over 2013 tax increases have investors lined up to sell profitable positions before year-end to cop only the 2012 tax rate.
While the US bond market has exhibited little of the volatility apparent in the stock market of late, last night the ten-years rose 4bps to 1.70%. This seems to be the wrong way around, given the Fed will be in the market as a buyer, which will maintain downward pressure on yields. However, the bond market responded to an important QE4 caveat, and that is that the Fed will buy bonds at US$45bn per month "initially". Having reset targets as economic data goals rather than time goals, the Fed is opening the door for a possible slowing of its easing program ahead of the previous mid-2015 time frame.
Whether or not the targets might be achievable before time as the economy grows at a moderate pace is up for debate, but the world and its dog are long US Treasuries and there's only so much the market can take. The word "bubble" is often trundled out.
The US dollar index fell an unremarkable 0.2% to 79.89 on the news of more funny money hitting the streets, while gold posted a Wall Street-like spike in jumping over US$10 before falling straight back to be little changed at US$1711.40/oz. And the bad news is the Aussie is up 0.3% to US$1.0553.
The LME closed last night before the Fed statement hit the wires, so a true base metal response will have to wait till tonight. In the meantime, the metals mostly edged a tad higher. The raging iron ore market has had a day off, with the spot price up only US10c to US$125.00/t. The oils, on the other hand, have taken to gradually ticking up of late. Brent was up US$1.49 to US$109.50/bbl and West Texas up US99c to US$86.78/bbl on QE4 and a decision by OPEC not to raise its production quota.
The SPI Overnight was up 3 points.
Wall Street was expecting QE4 and got it, and is expecting a resolution for Cliff. On that score, the popular belief is that despite ongoing public bickering that would suggest a resolution is nowhere near, behind closed doors a compromise is slowly edging closer. This will probably be the way of things up to New Year's, and Wall Street's direction in that period will likely be driven by economic data. Barring, that is, any explosions in Europe.
Tonight sees the release of US retail sales for November, which includes the much hyped Black Friday numbers.
Rudi will appear on Sky Business at noon.