- FOMC disagree on open-ended quantitative easing
- Risk sentiment declines: equities and commodities lower and US dollar higher
- Focus today will be February flash PMIs for France, Germany, euro area and US
Minutes from the January FOMC meeting released last night show that policymakers disagree on the path for the open-ended QE program through which the Fed buys 45bn treasuries and 40bn mortgage bonds per month. In the December minutes, participants discussed the timing of an exit from QE, but this time the discussion centred on the potential triggers for such an exit.
There is a general concern among FOMC members about the dangers of a bigger balance sheet, as well as the costs and risks of further asset purchases. According to the minutes ‘Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved’. It means that several members of the FOMC want a flexible approach for the purchases, and suggest that the FOMC should be ready to slow the pace of asset purchases. All in all, the FOMC minutes have demonstarted increased uncertainty about duration and size of the Fed’s QE program. As the disagreement on QE increases among FOMC members, the market can no longer be certain that the Fed will keep buying assets until the labour market has recovered.
Risk sentiment fell considerably after the FOMC minutes and both US equity markets and commodities declined. The S&P500 dropped 1.2% from a five-year high and the Dow Jones ended the day 0.8% lower while Brent oil fell 1.6% and is trading nearly USD2/bbl lower this morning at 115.
The sell-off in risk assets has continued in the Asian session and most regional indices are trading lower. In the time of writing, Nikkei and Hang Seng are down 1.4% and 1.8%, respectively.
The yield on 10-year US treasuries initially rose to 1.046 and was near the 10-month high set on 14 February at 2.06%. However, yield ended the day 2bp lower compared with the previous day’s close at 2.01% as equities were sold off.
In the FX market, the USD appreciated against all G10 currencies with the exception of JPY. USD/JPY fell to 93.45 while the EUR/USD has dropped to the lowest levels in over five weeks, and is trading below 1.3250 this morning.
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