Yes, we know — the markets were expecting more, at least on the long end of the curve, and 30-years got shellacked like Democrats.
But now that analysts have had some time to interpret the news, we thought it would be worthwhile to post what some of them have been saying about the broader implications of today’s events.
G7 Economics was hoping for more clarity on the Fed’s objectives, and looks ahead to the meeting’s minutes to be released on November 24:
What is surprising, however, is that the Fed has opted for a front-loaded, controlled impact rather than an open-ended approach with a clear end date of June 2011. …
Furthermore, there was little new guidance about how the Fed will evaluate its impact. The economic analysis is virtually unchanged… there was no mentioon of the Fed’s desired inflation or nominal demand objectives. While the Fed’s rationale to opt for $600bn of asset purchases will become clearer from the FOMC’s updated growth, unemployment and inflation projections in the minutes of this meeting due out on 24 November, the lack of new guidance injects some uncertainty into how the Fed will evaluate its effects and into the longevity of the QE2 phase.
Nomura did detect a meaningful change, writing that the Fed elevated the importance of the unemployment half of its mandate:
The post-meeting statement made one other notable change: it raised the profile of the “full employment” aspect of the Fed’s dual mandate. The September FOMC statement had noted inflation was below levels consistent with its mandate, but did not address the level of unemployment in this context. Today’s statement gave both issues equal play: “the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate”.
Citi on the implications for the USD — a gradual decline and lower implied vol:
For FX, there is little to suggest that the FOMC was out to derail the expectation of a significant purchase program despite the recent improvement in data. We continue to think that QE2, combined with other USD negatives related to external funding and central bank selling, will lead to a USD fall on trend. Implied volatility should drop, but we caution that payrolls surprises could heavily color how investors see the actual implementation. Net, net we see this as allowing for further USD drop, but drift rather than precipitous.
HSBC looks at the impact on emerging markets:
The longer developed markets’ rates stay low, the wider the good news about EM will be spread out, the more money managers focus on EM, and the more new investors are likely to approach this asset class. While EM yields are reaching new lows and some EM currencies are close to their most appreciated levels in real terms, a continuation of the low for longer scenario suggest valuations could get even more stretched out.
1. EM currencies are likely to continue to appreciate in the medium term
2. Most of the action is likely to take place on those that do not to resort to capital controls.
3. Hard currency debt could outperform local rates, as the external space is not contaminated with EM pushback against QE.
4. Central banks may fall slightly behind the curve, thus long-end receivers remain attractive
Related link:
QE2 sails right over the 35 per cent rule – FT Alphaville