Financial markets rebounded yesterday as the Fed signaled more stimuli on hand. This temporarily upstaged sovereign debt problems in the Eurozone. Wall Street advanced with DJIA and S&P 500 gaining +1.53% and +1.61% respectively. However, there was only modest narrowing in peripheral yield spreads. In the commodity sector, WTI crude oil fluctuated between 90.97 and 93.79 as price was torn between continued deterioration in macroeconomic outlook and hopes that further Fed easing would boost growth. Gold ended the day higher as further Fed easing would trigger weakness in the US dollar. Today in Asia, equities led the markets lower after China's services PMI missed expectations.
As expected the Fed left the policy rate unchanged at 0-0.25% and made no change in the stimulus. While providing a more positive tone on economic growth and household spending, the latest staff projections on economic growth were downwardly revised from those estimated in June. The latest set of economic forecasts showed that the central tendency for GDP growth in 2011 is now 1.6-1.7%, compared with 2.7-2.9% in June. Growth rate for 2012-13 was also revised downward by about -0.5%. These have resulted in a prolonged period of dismal job market. Fed members now expect the unemployment rate to fall 8.5-8.7% in 4Q12 and 6.8-7.7% in 4Q14. Concerning inflation, forecasts of PCE and core PCE inflation for this year were raised modestly while those for 2012 and beyond stayed largely unchanged.
Chairman Ben Bernanke appeared to favor more on tying the level of the Fed funds rate to unemployment and inflation levels thresholds or disclosing FOMC members' interest rate forecasts. Concerning additional stimulus, Bernanke considered large-scale purchases of agency MBS as a 'viable option'.
The biggest overhang in the sovereign debt crisis in the Eurozone remained in Greece. News reports said that the referendum on the EU bailout plan will be held in December if the government does not fall in Friday's confidence vote. Dutch Finance Minister Jan Kees de Jager said that the 6th tranche of the EU/ECB/IMF funding will be delayed until the referendum is completed.
On the data flow, China's services PMI fell to 57.7 in October from 59.3 a month ago. This added worries about the economic slowdown in the world's second largest economy and would probably allow the government to ease monetary policy. US services PMI probably climbed +0.5 points to 53.5 in October while factory orders dipped -0.1% m/m in September.