Daily London Outlook 13th August 2009

Daily London Outlook 13th August 2009

As widely expected the Fed left the policy rate unchanged at 0-0.25% last night and reaffirmed that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’. But the statement noted that ‘economic activity is levelling out’, which was slightly more upbeat than June’s comment that ‘the pace of economic contraction is slowing’. Consistent with this slightly more upbeat tone, the Fed left the size of quantitative easing program unchanged and said it would ‘gradually slow’ the pace of its US Treasury purchases, anticipating that the full amount will be completed by the end of October.

  • In the wake of the FOMC statement, the USD initially strengthened across a broad range of currencies. The USD Index surged from 78.70 to around 79.20, but the uptrend quickly ran-out of steam and euro-dollar fell back and is around 1.4254 this morning. The US 10-year bond yield is now at 3.725%, having risen from a low of 3.6325% yesterday, with little change in the 2-year yield. The combination of hopes for an economic recovery and no immediate pull-back in rates was friendly for stock markets. The Dow Jones rallied to a high of 9424 after the statement before easing back, though ending up 1.3% on the day. Asian markets followed the US higher, boosted by higher commodity prices. The price of a barrel of crude is at $70.92 this morning, from a low of $68.84 yesterday.
  • This morning is getting off to an interesting start with news from the first release of GDP for Germany and France that both economies actually grew in the second quarter, both by 0.3%. That is a much better result than expectations for continued declines and calls into question the common assumption that the eurozone will exit the recession after the US and UK. While the devil is in the detail and the figures may have received temporary boosts from government spending and policies such as car scrappage schemes, in the short-run the news is likely to help support the euro.
  • Still to come today we get the full euro-zone flash estimate of GDP, now expected flat to down 0.1%, while this afternoon the US retail sales data are looked to post an increase in an increasingly interesting tug-of-war over relative macro prospects between the key economies.

 

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