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Minutes Unlikely To Suggest Imminent Fed QE

Published 07/11/2012, 07:42 AM
The 2 main market stories of 2012 remain the eurozone crisis and whether the Federal Reserve decides that the deterioration in global financial conditions warrant it pumping more money into the system via another set of asset purchases. The board have already moved to extend “Operation Twist,” a sister program to QE that does not extend the Fed’s balance sheet. This was done last month and the market reaction was one of disappointment.

The latest minutes from the most recent Fed meeting are arguably the most important data this week. The extension of “Operation Twist” is a stopgap that gives the Fed time to see exactly how bad the outlook for global growth becomes between now and the end of the year. At the moment, despite Friday’s nonfarm payroll numbers being lower than estimated, they could have been a lot worse. Similarly figures out of Europe such as PMIs, industrial production and unemployment could have disappointed more significantly. If the Fed throws more money at the situation then it’s because it warrants it; the global economic picture may not need it now but a continuation of current trend will see that lever pulled soon.

At the moment the situation that eventually will determine what the Fed does, Europe, is a little quieter than usual. As we spoke about on Monday this has led to a gradual grind lower in risky assets with the euro sinking further into the mire. This is despite yields on Spanish and Italian debt retreating a little in yesterday’s session following the decision to extend the timeline on their current austerity measures. There were large protests in Madrid from union members against austerity yesterday with more forecast in the near future.
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Elsewhere, the debate over the funding channels of the EFSF and the ESM to Spain’s banking sector remains. Some market news yesterday suggested that this would not be sorted until the end of the year whilst some suggested the end of the month. As it stands at the moment, the ESM still needs to be declared constitutional in Germany although we doubt that this will end in tears. Famous last words withstanding of course.

Reports from Italian newspaper Corriere this morning suggest that Silvio Berlusconi is preparing to run for PM again. This comes after Mario Monti confirmed yesterday that he will not run for another term as PM. This had little effect on Italian yields although there is sufficient event risk given the bun fight that Italian politics can be.

Apart from the Fed minutes, today’s data calendar is quiet and politician chatter the likely catalysts.
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