QE3 Is Here
The FOMC announced QE3 on Thursday and extended the fed funds rate guidance to mid-2015 while continuing Operation Twist. As part of QE3, the Fed will purchase agency MBS at a rate of USD40 bn per month – this will increase the total purchases of longer-term securities to USD85 bn per month, after taking into consideration purchases in the Twist program. The FOMC statement noted that the Fed will continue to purchase agency MBS till the labor market “improves” but no guidance is given on what the FOMC considers as ‘improvement’. Chairman Bernanke later remarked that the Fed cannot sustain purchases all the way to full employment, noting “that is not the objective”. Fed members revised their growth and inflation outlook upward in 2013, after factoring in the effects of the latest stimulus. Forecasts for unemployment rate, however, remained hardly changed at 7.6% to 7.9%. vis-à-vis June’s projections. Further highlighting the bleak economic outlook of the Fed, the projections indicated that 12 out of 19 officials think that the appropriate time for a rate hike is 2015 – a marked change from the June assessment where 13 out of 19 officials thought policy tightening is appropriate prior to 2015. Both the statement and Bernanke’s press conference sounded more dovish than markets expected that led to USD sell-off across the board. S&P500 soared above 1460 and EURUSD momentarily broke the 1.30 level as risk appetite gained. USDJPY however traded in ranges as markets watched out for a possible intervention from Japan’s MoF. Vice Finance Minister Nakao noted on Thursday that recent moves in JPY are “clearly speculative” and cannot be overlooked. Ahead today, markets will pay attention to the Eurogroup meeting in Cyprus besides the data releases in the US.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank