Recap 6-20-12

Main Items:

  • Fed is extending Operation Twist through year end.
  1. “The Committee is prepared to take further action as appropriate”
  2. 1/3rd of twist purchases will be in the 6-8yr sector, and another 1/3rd in the 8-10yr sector, 29% in 20-30yr sector.


  1. The distribution of FOMC participants’ assessment for the first hike was broadly unchanged. 7 members thought it would happen in 2014, and 6 in 2015.
  2. 2012 GDP: 2.15% vs 2.65% prev
  3. 2012 Unemployment: 8.1% vs 7.9% prev
  4. 2012 Core PCE: 1.85% vs 1.9% prev

MPC voted just 5-4 against more QE this month, and Mervyn King was amongst the doves. This is a more dovish vote than expected and heightens expectations for more QE next month.

  1. The Committee judged that the upside risks to inflation had lessened. The recent fall in commodity prices meant that the near-term outlook for inflation was somewhat weaker than a month ago.
  2. In addition, the downside risks appeared to have grown.
  3. On balance, most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target.


  • German PPI declined to 2.1% YoY in May vs 2.2% exp and 2.4% prev
  • UK Unemployment was stable at 8.2% in Apr as exp.
  • Switzerland Zew Survey dropped to -43.4 in June vs -4 prev
  • Japan Adj Trade Balance declined to -657bn in May vs -348bn exp and -480bn prev, as imports increased much more than expected.

Upcoming Data:

  • Thurs: EU PMI, UK Retail Sales, US Jobless Claims, Markit US PMI, Philly Fed, EU Consumer Confidence, Spain external stress test
  • Fri: German IFO, Canada CPI
  • Mon: Chicago Fed Index, US New Home Sales, Dallas Fed
  • Tues: US Consumer Confidence, RichmondFed, South Korea Business Survey
  • Wed: German CPI, US DGO, Pending Home Sales, Japan PMI

Commentary & Links:

Over the past month, global markets were trading off of the back of EU worries, and with good reason. With EU policy makers now preparing the next steps to combat the contagion, global risk markets are retracing their sell off. From that perspective, the rally we’ve seen over the past 3 weeks looks reasonable.

But the underlying drivers are shifting. Little attention appears to have been paid to the weakening in the US data, and the fact that the Fed’s ability to support the economy further is limited. As negative economic surprises have increased, consensus growth expectations have been ticking downward. Last month’s weak payrolls print was corroborated by both a pickup in initial jobless claims, as well as the JOLTS data. In additional seasonal effects still lingering from 2008/9 are likely to drag down data again this summer, as they have in the past 2 summers. And of course, the debt ceiling debate is set to heat up, as the Treasury runs out of money in early Sept.

Given that we are once again approaching the data-heavy part of the calendar, it may be time to bet on a retracement of this risk rally.