Need To Know News

Better-than-expected readings on GDP and Chicago PMI pushed equity indices higher ahead of this afternoon’s FOMC announcement. When the FED reported it cut interest rates to 2%, equities rallied briefly but then sold off steadily into the close.

Telecoms and energy stocks were the only sectors of the S&P to post increases. Consumer Discretionary shares were the worst performers, led lower by GM’s bigger-than-expected Q1 loss.

Dow Futures closed down 22 to 12804. S&P Futures closed 6.75 lower at 1384.50. Nasdaq Futures finished at 1922, down 17.

Extended buying into the long end continued this afternoon despite a bit of back-and-forth after the FED’s 25bp rate cut as markets tried to read the tea leaves on how neutral the FOMC will be going forward. The FED’s statement seems to indicate the rate-cutting cycle is at an end.

Beyond the FED’s proclamations, TSY said today that it expects increased issuance over the remainder of the fiscal year. It will commence issuing the 52-week bill every 4 weeks to reduce reliance on cash management bills.

Yields on the short end jumped higher after the decision, but then flipped and headed lower, with the 4wk bill yield down 10bps to 1.17%. The 3-month was down 6 to 1.4%, while the 6-month was 10bps lower at 1.63%.

Buying in longer-dated maturities steepened the curve just a bit today, with the 2yr yield sinking to 2.27% and the 10yr yield down to 3.738%. The 30yr added a handle to yield 4.483%.

USD knee-jerked higher after the FOMC cut 25bps from the Fed Funds and Discount rates while addressing the potential for further near-term rate easing. The Greenback sold off after its initial bounce higher and is now trading lower across the board with the USD Index down 0.4%.

EUR/USD caught a decent bid following the rate decision and is up 0.32% to 1.5618 after trading flat for most of the day.

Cable strengthened and is currently trading in the upper portion of today’s range up 0.93% to 1.9880. EUR/GBP is down 0.6% to 0.78597.

USD/JPY traced the post-rate announcement rally in equities and peaked out at 104.75 before a fervent sell-off into the close pushed USD/JPY into the red at 103.90.

USD/CAD traded in the red for most of the day to finish down 0.65% at 1.0061.

July FED Fund futures ticked higher after FOMC and now show a 21% chance of a 25bp cut on June 25, and a 78% chance rates will be left unchanged.

Economic growth
Previous (March 18 meeting): “Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.”

Now: “Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further.”

Exactly the same: “Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”

Inflation
Previous: “Inflation has been elevated, and some indicators of inflation expectations have risen.”

Now: “Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.”

Exactly the same: “The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.”

Monetary policy
Previous: “Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.”

Now: The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

New FED Funds rate 2.00%

New Discount Rate 2.25%

The FOMC’s statement says financial markets remain under considerable stress, labor markets have softened, and the deepening housing contraction is “likely to weigh.”

There is some indication that inflation expectations have risen in recent months. Energy and other commodity prices have increased, the FOMC noted. The FOMC still expects a leveling-out of energy and other commodity prices.

The FOMC calls its recent policy actions “substantial” and says it will continue to monitor economic and financial devleopments and will act as needed to promote sustainable economic growth and price stability.

Dissenters: Fisher, Plosser (no surprise there)