Yesterday’s Fed meeting has disappointed markets overnight as the Fed took the cautious option of extending one form of stimulus whilst holding another back. They extended Operation Twist until the end of the year but declined to increase any outright purchases of mortgage backed securities. To cut a long story short and eliminate the jargon Operation Twist is designed to lower long term interest rates to encourage borrowing and push spending forward. It is not QE per se but is a form of market operations and would be viewed as encouraging to risk and assets versus the dollar.
Further asset purchases were always going to be unlikely due to political pressure and we do not think the situation necessitates such a large bazooka at the moment. Had the Greek elections been more of a disaster or should Spain and Italy continue their slide closer to the abyss then this is a plan that can be kept in the back pocket and wheeled out if necessary. The Fed also revised its expectations of the performance of the US economy lower last night with growth now forecast at 2.4% through 2012 against 2.9% previously. It is obvious that the stimulative role of central banks is far from over.
A similar conclusion can be drawn following the minutes from the most recent Bank of England meeting. Bank of England minutes have shown that this month’s voting record went 5-4 in favour of holding asset purchases while it was unanimous to hold interest rates at 0.5%. 3 members voted for £50bn extra, including the Governor, while one voted for an extra £25bn. This is not really a shock given the general economic weakness globally and it shows just how close the MPC have come to pumping more money into the markets. The key thing now will be whether the recent funding for lending scheme announced last week by the Chancellor is a replacement or a companion of further QE next month.
Following Tuesday’s slip in inflation to 2.8%, we are now looking for the BOE to raise asset purchases next month by £50-75bn depending on the fluctuating headwinds from Europe.
The lack of the sugar high from the Fed ensured that the markets closed New York and opened in Asia in a poor mood. We haven’t seen a dramatic sell off but a slight turn lower for those assets that had been chased higher earlier in the week. Adding to the mix was the latest PMI manufacturing data from the Chinese that showed the 8th consecutive dip for the sector, mainly as a result of falls in export orders. We get similar numbers from the Eurozone today with all, Germany apart, expected to remain below 50.0 and therefore continuing to show contraction.
UK retail sales are due at 09.30. The previous figure was a dreadful -2.3% as a result of the rebalancing following people’s desire to buy huge amounts of petrol in March and the horrific April weather so we are expecting a strong positive number this month. It is unlikely however, to halt calls for further stimulus from the Bank of England however.
Elsewhere we have a Spanish bond auction of 5yr debt which will once again be able to gauge how open funding markets are to the country. They will be open but just at a price although Spanish bond yields are now off the highs and below the 7% level following comments from an ECB member that the EFSF should be allowed to buy sovereign debt and the agreement on a coalition in Greece.
There is also a raft of data from the US this afternoon including leading indicators, Philadelphia Fed manufacturing and existing home sales and an independent audit of the Spanish banking market that will tell us whether the EUR100bn pledged 10 days ago will be enough.
Indicative Rates Sell Buy
GBPEUR 1.2369 1.2393
GBPUSD 1.5660 1.5680
EURUSD 1.2645 1.2665
GBPJPY 124.65 124.90
GBPAUD 1.5418 1.5444
GBPNZD 1.9612 1.9640
GBPCAD 1.5996 1.6025
NZDUSD 0.7972 0.7992
GBPZAR 12.92 12.97
USDZAR 8.2407 8.2830
GBPPLN 5.2573 5.2844
EURJPY 100.59 100.86
Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rate fluctuate all the time. The rate you will receive will depend on the amount and currency you require.
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