Wednesday, September 21, 2011

Problems in Europe overshadow Operation Twist


Chart: S&P500 futures 1 day 2011-09-21; stooq.com


As anticipated, Fed has announced the "Operation Twist" today. The declared scale of the operation is a little larger than anticipated. And as a result markets have sunk by 3%... (still, -2.94% is better than
-6.66%
 ;)

Early comments point to the wording of the FOMC statement about the "significant downside risks to the economic outlook, including strains in global financial markets" (previously: "downside risks to the economic outlook have increased").

Is it really so strange that FOMC confirms there is a culminating problem in Europe, or is there something more?

Since reading even a pretty short FOMC statement is not so easy when markets are reacting aggressively in the real time, many people probably haven't noticed yet a number of slightly positive changes in the wording:

AUGUST > SEPTEMBER

  • indicators suggest a deterioration in overall market conditions > indicators point to continuing weakness in overall market conditions
     
  • household spending has flattened out > household spending has been increasing at only modest pace
     
  • inflation picked up earlier in the year > inflation appears to have moderated since earlier this year
     
  • The Committee now expects a somewhat slower pace of recovery over coming quarters > The Committee to expect some pickup in the pace of recovery over coming quarters
     
It seems, Fed has observed some weak signals of the improvements in the economic conditions. The economy is still very fragile, especially the labor market. There is also a significant risk that - when realized - can have a tremendous impact of financial markets.

Probably what has been missing in  the FOMC statement is some kind of declaration that Fed is monitoring the situation and is willing and able to act in case of negative developments. Unless there is nothing Fed can do to mitigate this particular risk and market reaction is correct?


Meanwhile, USDJPY has managed to bounce back from the previously mentioned 76.00 defense level. Will see how long it will last...

Chart: USDJPY & USDEUR 1 day 2011-09-21; stooq.com


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