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October 2013

The FOMC Statement Was Less Dovish Than Expected

The FOMC statement published last night was little changed from September, a dynamic that sent stocks further into negative territory. The fact is that it was less dovish than the consensus expected for several reasons:


1/ The statement scrapped the previous language regarding the recovery risks from higher mortgage rates and tighter financial conditions.
2/ Many economists highlighted expectations for a slight downgrade to the economic assessment given the drag from the fiscal issues and signs of weakening momentum in the labor market (September employment report, October ADP and Intuit Survey…)
3/ The FOMC demonstrated it is in “wait-and-see mode” to the extent it did not explicitly signal a pushback in the timing of an initial tapering move.


More from FOMC:


Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.


October 31st – Top Stories

1/ US


- Fed stays the course on bond buying - FT – By Robin Harding in Washington and Michael Mackenzie in New York


The US Federal Reserve said the world’s largest economy is still expanding at a moderate pace in a statement that suggests a slowing of asset purchases in December or January is still under consideration.
The rate-setting Federal Open Market Committee made no changes to policy at its October meeting, keeping its asset purchases steady at $85bn a month, but the statement implied it did not see a lot of damage from a three-week government shutdown earlier this month.


2/ China


- Top Chinese Banks Post Biggest Bad-Loan Surge Since 2010 - Bloomberg – By Bloomberg News


China’s top four banks posted their biggest increase in soured loans since at least 2010 as a five-year credit spree left companies with excess manufacturing capacity and slower profit growth amid a cooling economy.
Bad debts at Industrial & Commercial Bank of China Ltd. (1398), China Construction Bank Corp. (939), Agricultural Bank (1288) of China Ltd. and Bank of China Ltd. (3988) rose 3.5 percent in the third quarter to a combined 329.4 billion yuan ($54 billion), data compiled from earnings reports shows. Profit rose to 209 billion yuan while their average bad-loan ratio widened to 1.02 percent.


- China Money Rates Slide as PBOC Adds Cash, Seasonal Factors Wane - Bloomberg – By Bloomberg News


China’s money-market rates fell and interest-rate swaps retreated from the highest level since June as the central bank added cash to the financial system for the second time this week.
The People’s Bank of China conducted 16 billion yuan ($2.6 billion) of 14-day reverse-repurchase contracts today at a yield of 4.3 percent, according to a trader at a primary dealer required to bid at the auctions. That followed an injection of 13 billion yuan via seven-day reverse repos at 4.1 percent on Oct. 29. Commercial banks hoard cash toward month-end to meet liquidity requirements set by the central bank and corporate tax payments fell due in October, locking up funds.


3/ Eurozone & UK


- ECB agrees standing swap arrangements with other central banks - Reuters

MThe European Central Bank said on Thursday it was converting temporary bilateral liquidity swap arrangements with five other central banks to standing arrangements that would remain in place until further notice.


The Spanish GDP Rebounded in Q3 after Nine Quarters of Contraction

Spain emerged from a two-year recession in the third quarter. Growth was driven by overseas sales as domestic demand fell 0.3%, the Bank of Spain said today. The decline in investment slowed and private consumption grew 0.1% from the previous quarter, when it was unchanged.




These data are positive to the extent Spanish economy represents 12% of the Eurozone economy (real GDP) which implies a positive contribution of 0.012% in Q3. However, Spanish economy is still depending on exports to drive growth as austerity continues to hold back domestic demand. The recent rise of euro against main currencies could weight on GDP in Q4.


More from Bloomberg:


Spain emerged from a two-year recession in the third quarter, strengthening Prime Minister Mariano Rajoy’s efforts to repair the nation’s finances and reduce the 26 percent jobless rate.
Gross domestic product expanded 0.1 percent from the second quarter, when it shrank 0.1 percent, and fell 1.2 percent from a year ago, the Madrid-based Bank of Spain estimated in its monthly bulletin today. The data, which are preliminary, matched the median estimate of 37 economists in a Bloomberg News monthly survey.

October 30th – Top Stories

1/ US


- QE expected to continue through 2014: CNBC survey - CNBC – By Steve Liesman


In a dramatic shift, the October CNBC Fed Survey finds Wall Street expecting the Federal Reserve to maintain its $85 billion level of monthly asset purchases until April 2014. That’s five months ahead of the average in the last survey.
What’s more, the 40 respondents—economists, strategists and money managers—see the Fed buying about $650 billion of assets next year, up from $381 billion in the September survey.
The current program, known as quantitative easing, in which the Fed buys government bonds and mortgages in an effort to stimulate the economy by driving down interest rates, is expected to last until December 2014. Respondents to the previous survey had thought the Fed would end its purchases by August.


2/ China


- China to hold key economic reform meeting Nov 9 to Nov 12 - Bloomberg – By Bloomberg News


China’s leaders will hold a key meeting to discuss deepening financial reforms between November 9 and November 12, the official Xinhua news agency said, as the ruling Communist Party looks to set its economic agenda for the next decade.
The meeting marks the third time China’s 200-member Central Committee has gathered since last year’s leadership change. Historically, such meetings, known as third plenums, have been a springboard for economic change in China.


3/ Eurozone & UK


- Draghi Seeks Liquidity Tools to Fit ECB Rate Policy: Euro Credit - Bloomberg – By Jana Randow

Mario Draghi’s quest for new liquidity tools is proving more complex than two years ago.
When the European Central Bank president decided in 2011 to provide euro-region banks with three-year loans to ease a credit crunch, liquidity and interest-rate policies were separate issues. Now, cheap funding has the potential to affect the ECB’s interest-rate guidance and prompt banks to shore up their balance sheets rather than boost lending to companies and households as they undergo a review of their accounts.
ECB officials are drawing up plans to keep money flowing to banks to head off a liquidity squeeze when the first round of emergency long-term loans comes due in early 2015.