Market sentiment was mixed yesterday as torn between negative European news flow and Fed's dovish minutes which suggested further easing is likely. Wall Street waxed and waned with the DJIA losing -0.23% while the S&P 500 gaining +0.02%. In the commodity sector, crude oil prices gained as the US dollar lost ground amid expectations of monetary easing. After gaining modestly on Wednesday, WTI crude oil climbed further higher today with the front-month contract soaring to as high as 98.17 and the Brent crude contract rising to as high as 116.01. Gold soared for a 7th consecutive day today. As speculations of further Fed easing loomed, the yellow metal appeared to have broken above recent barriers and climbed to as high as 1668.2.
In the Eurozone, Greece asked for more time to implement its fiscal reduction plan. Prime Minister Samaras told a German newspaper that Greece does not need extra money but more time to complete its austerity measures. According to Samaras, "we stand by our commitments and the implementation of all requirements. But we must encourage growth, because that reduces the financing gaps". Yet, whether more time would be granted remained unknown. The Eurogroup's Jean-Claude Juncker stated that this would depend of the findings of the EU/IMF/ECB troika although he was "totally opposed to the exit of Greece" from the Eurozone. Elsewhere, rating agency Standard and Poor's said that a full bailout of Spain would not hurt its credit ratings, noting "the potentially advantageous terms Spain could receive under a full bailout could enhance the chances of success of Spain's already ambitious and politically challenging fiscal and economic reform agenda".
The Fed's August minutes were dovish, indicating further monetary easing highly likely. As the minutes indicated that many members believed that more monetary easing measures should be implemented soon unless upcoming economic data showed "a substantial and sustainable strengthening" in economic recovery. Further monetary easing has now become a matter of "when", instead a matter of "if". Policymakers considered discussed a variety of easing measures, ranging from language guidance to balance sheet expansion. The Fed revised lower the near-term growth outlook but maintained the medium-term forecasts largely unchanged. Yet the major concern remained the job market as many members continued to expect the unemployment rate would still be "well above their estimates of its longer-term normal rate" while "inflation would be at or below the Committee's longer-run objective of 2%.
As stated in the minutes, "a number of" members believed further monetary easing would help "foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued". "Many members" viewed that additional stimulus would "likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery". Only one member said that more easing would not help improve the economic outlook. As the meeting was held before release of the July employment report, we believe the next trigger point would be the August report (due September 7), together with the Beige book and Fed Chairman Ben Bernanke's Jackson Hole address on August 31. It's likely that further monetary measures would be announced in September but the tool might not necessary be QE3. Judging from the tone in the minutes, policymakers might choose to change the language guidance at that meeting.