Despite the Fed's extension of Operation Twist and German Chancellor Merkel's softer stance on bond purchases by the EFSF/ESM, market sentiment was hardly lifted much. Wall Street slipped with the DJIA and the S&P 500 indices losing -0.10% and -0.17% respectively. In the commodity sector, crude oil price slumped. The front-month contract for WTI crude oil plunged to as low as 80.86 before settling at 81.45, down -3.07%, while the equivalent Brent crude contract fell to 92.38, the lowest since December 2010, before ending the day at 92.69, down -3.21%. Gold broke below 1600 again at one point as the Fed did not announce QE3 but then bounced back, ending day at 1615.8.
The Fed announced after the two-day meeting that it would extend its Operation Twist program through to end 2012. It has committed to sell Treasuries with remaining maturities of 3 years or less while simultaneously purchase an equal amount of US Treasuries with remaining maturities of 6 to 30 years. The total amount would be worth of $267B based on the current trend. Policymakers remained dovish in the economic outlook and viewed that 'low rates of resource utilization' and 'a subdued outlook for inflation over the medium run' would 'warrant exceptionally low levels for the federal funds rate at least through late 2014'. Meanwhile, the central bank pledged to 'take further action as appropriate to promote a stronger economic recovery'. Economic forecasts have been significantly downgraded. GDP growth (+1.9% to +2.4%) was revised lower to 1.9-2.4%, compared with April's projections of 2.4-2.9% and January's 2.2-2.7%. Growth in 2013 was also lowered to 2.2-2.8% compared with 2.7%-3.1% in April. The unemployment rate expectation was raised to 8.0-8.2% in 2012 from 7.8-8.0% as projected in April. For 2013, the forecast was raised to 7.5-8.0%, compared to April's forecast of 7.3-7.7%, while that for 2014 was also up to 7.0-7.7% from 6.7-7.4% previously. As mentioned in the statement, 'growth in employment has slowed in recent months, and the unemployment rate remains elevated' and 'the unemployment rate will decline only slowly'. Concerning inflation, the central tendency for headline PCE inflation was downgraded significantly to 1.2-2.7% for 2012 from 1.9-2.0% as projected in April, due to lower energy and oil prices. Core PCE forecasts were essentially unchanged.
In the Eurozone, speculations about allowing the EFSF and ESM to purchase Spanish and Italian bonds in the open market were heated as France and Italy pushed for it. Regarding this, German Chancellor Merkel initially stated that this is not a subject of debate right now, but then said that there is a possibility to buy government bonds on the secondary market through the EFSF and ESM. This has lifted market sentiment somehow. Meanwhile, a coalition government in Greece has eventually been formed among New Democracy, PASOK and the Democratic Left. The Eurogroup meeting of Finance Ministers in Luxembourg today is expected to see the formal request from Spain for assistance for its banking sector after the stress test of its banking system has been released.
On the dataflow, initial jobless claims probably dipped -1K to 385K in the week ended June 16. The Philly Fed index might have improved to 0 in June from -5.8 a month ago. Existing home sales probably slid to 4.56M in May from 4.62M a month ago.