- FOMC statement shows no change in asset purchases or rate guidance.
- Jens Weidmann criticises current euro crisis framework.
- Reserve Bank of New Zealand keeps rates unchanged.
The FOMC statement was very much in line with the December statement. There was no change in asset purchases or rate guidance. The new voting member, Esther George, dissented (she is hawkish). Fed’s assessment of the recent economic developments was a bit more downbeat than in December but the economic weakness is expected to be transitory. The dovish statement should dampen the upward pressure on treasury yields currently in place. For further details see FOMC: Easing bias remains in place, 30 January.
German Bundesbank president Jens Weidmann yesterday evening in Berlin criticised the current crisis framework, saying that "if things stay the way they are, the consequences of unsound [national] policies will be too easily passed on to others." He argued that risk sharing measures have already reached a substantial level and that "if these risks rise, the culture of stability could be eroded as if we had explicit joint liability." He argued that bailouts can accompany structural reform and soften the blow but they cannot replace it.
Reserve Bank of New Zealand kept rates unchanged but warned about increased house price inflation, which is seen as a sign that the next rate move is up. Central Bank Governor Wheeler said that "we expect economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2% target midpoint."
Japan’s industrial production rose 2.5% m/m in December, which was well below consensus expectations. The weakening yen is expected to lift production with a lag.
The US equity markets traded in negative territory throughout most of the session as sentiment had soured from the start after the disappointing US GDP figures showed a 0.1% q/q decline in the fourth quarter. S&P 500, Dow Jones and Nasdaq all lost 0.3- 0.4%. The negative sentiment continued in the Asian session with the Nikkei index down 0.7%, while Hang Seng has lost 0.5%.
US bond yields closed slightly lower with both 2-year and 10-year yields falling about a basis point. Japan’s 5-year yield fell 1.5bp to 0.14%, which is the lowest on record.
In the FX markets EUR/USD strengthened to a 14-month high yesterday as EUR strengthened on European Commission confidence data that came out better than expected, while the FED announcement weakened USD. Throughout the night EUR/USD has traded around 1.3570.
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