- The Fed surprises and introduces "Evans rule" and asset purchases of USD 45bn.
- US stocks rallied but gave up the gains as fears over fiscal cliff returned.
- Eurozone agrees on common bank regulator as compromise is reached.
- Berlusconi may pull candidacy for president if Mario Monti runs. Markets Overnight
The Fed surprised yesterday by announcing numerical threshold values for unemployment and inflation that will guide the first Fed funds rate hike – see Flash Comment US: Another step up in easing, 12 December. The Fed funds rate is now expected to be held at its current level as long as the unemployment rate is above 6.5%, one-to-two year inflation expectations are not above 2.5% and longer-term inflation expectations remain well anchored.
We did expect such a move but not until spring next year. In addition, the expiring Twist programme was fully replaced by outright Treasury purchases of USD 45bn per month. This means a significant expansion of the Fed’s balance sheet in 2013 but this was expected.
The announcement led to a strong rally in equity markets but the gains were erased as fears over the fiscal cliff returned. Fed Chairman Bernanke warned at the press conference that the Fed could not shield the economy from the cliff while House speaker Republican John Boehner told fellow Republicans not to make plans over Christmas.
The S&P500 ended flat on the day. Japanese stocks got a further boost from a continued yen weakening. The more aggressive Fed adds to expectations that Bank of Japan will also step on the gas and pump more yen into the economy.
EUR/USD also rose on the Fed announcement and US 10-year bond yields are higher as well. In Scandies both EUR/SEK and EUR/NOK increased yesterday evening.
The eurozone finance ministers Thursday morning agreed on a common bank regulator. ECB will now be supervisor for banks with assets of more than EUR30bn amounting to 150-200 banks. ECB also retains the power to intervene in any bank and give instructions to national supervisors but it is unclear exactly how strong this power is going to be.
The agreement marks the first step towards a banking union and comes before the self-imposed year-end deadline. However, Germany’s finance minister Wolfgang Schäuble made it clear that allowing funds from the ESM to be injected directly into ailing banks could not take place until well into 2014.
Italy’s Silvio Berlusconi made another surprising move by expressing that he is ready to give up his candidacy for presidency if technocrat prime minister Mario Monti will go to elections as leader of a broad moderate alliance.
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