When the FOMC announced the Fed was prepared to ease further at the conclusion of the 9/21 meeting it set off a huge run lower in rates on the belief the Fed was intent on driving long term rates lower. The 10 yr note yield fell 45 basis points and mortgage rates declined 24 basis points. The dollar declined and the equity markets rallied. Recently though the outlook for a strong easing move from the Fed has faded and the rate markets are now back to levels prior to the FOMC meeting. The read on the easing initially was that the Fed would buy significant amounts of treasuries to drive long term rates lower, bust the dollar and ignite more interest in the housing sector. Over the last 10 days the sentiment has changed; presently the consensus is that the Fed will launch an easing move but that it will be at a slower pace than the initial expectations.
The stock market opened better this morning on the weak dollar; after a couple of days of improvement the dollar is under pressure again today. China’s yuan fell to its weakest level this month after the central bank set a lower reference rate for a third day, spurring speculation the government is limiting appreciation. The People’s Bank of China set the reference rate 0.11% weaker at 6.6986 against the greenback. The yuan has weakened 0.5% since policy makers from the Group of 20 nations said on Oct. 23 they would refrain from “competitive devaluation” before the Nov. 11-12 leaders’ summit. The Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners, declined 0.6% to 77.698. The gauge has fluctuated between gains and losses this month as speculation additional credit-easing measures from the Fed will weaken the currency were offset by bets the central bank will buy a smaller amount of bonds than some analysts predicted.
At 1:00 Treasury will auction $29B of 7 yr notes; yesterday's 5 yr note was met with OK demand but not nearly as strong as past auctions. The 7 yr today will be more difficult to get strong demand.
The Fed is about to turn on the printing press to print more dollars. That is what QE is all about. The Fed however talks about helping revive the economy with the easing while the real emphasis is to drive down the dollar to improve exports and improve the economy. Lower interest rates, while helping, is only a method to beat down the dollar. The problem is however, that every country is trying to do the same. With the Fed about to "ease", the effect will be that other central banks will be forced to do the same. The recent jump back in rates has likely run its course but we are left with the question, how much lower will rates fall when the Fed actually announces its easing policy, and will the Fed lay out the entire plan being formulated? Flying blind, throwing it against the wall to seer what sticks. Unemployment isn't going to fall much, consumers still deleveraging and the housing sector shows no real signs of stabilizing. Lower interest rates are just a by-product of the Fed printing more money to bring the dollar down.
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