Yesterday, the Fed issued the following statement:
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
Some of the key points include:
1) they extended the forward guidance until mid-2015, and 2) the FOMC made it clear that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. “AFTER the economic recovery strengthens” is key.
2) This easing was not based on new economic weakness. From the FOMC statement: “economic activity has continued to expand at a moderate pace in recent months”. This easing was intended to help increase the pace of recovery.
3) Another key change was the FOMC tied this easing directly to the labor market: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Stocks are up strongly in response.
The easing of monetary conditions in the U.S. and Europe are the primary drivers of stock prices currently. The next challenge for the market will be to digest Q3 earnings which should confirm weak economic conditions. We have seen a number of bellwether companies preannounce to the downside including UPS and Fed Ex.
In CBRE Group (CBG), 5x the normal volume traded with the action concentrated in the CBG Dec 19 Calls.
In CBS corporation (CBS), there was an opening buyer of 45,000 Jan 42 calls.