US Federal Reserve Extends “Operation Twist”, Markets Disappointed
On Wednesday, the US Federal Reserve announced their intention to extend “Operation Twist” through the end of 2012 in light of slowing US growth and rising unemployment. “Operation Twist” refers to the Fed's programme of purchasing longer-term debt and selling shorter-term debt in an effort to drive drown long term bond yields, and in essence flatten the yield curve. By doing so, the Fed hopes to encourage growth in employment and consumer spending in an effort to reignite GDP growth. Markets had broadly hoped for more comprehensive stimulus action along the lines of a third round of quantitative easing (QE3) but were left disappointed. Following the Fed's announcement, the S&P 500 index dropped 0.7% to close down 0.2%.
Eurozone PMI Data Disappoints, German Sentiment Erodes
On Thursday, Markit released their monthly flash PMI data for the eurozone revealing a reading of 46.0 for the region. A reading above 50 indicates economic expansion, whereas a reading below 50 indicates contraction. The PMI number has historically been positively correlated with GDP growth. The eurozone PMI number stayed constant from last month's reading and modestly beat market expectations of 45.5. Chris Williamson, Chief Economist at Markit, stated that the reading indicated that eurozone GDP has likely declined by 0.6% for the month of June and the downturn is accelerating. Germany was not immune to the acceleration of the downturn as its composite PMI fell from 49.3 in May to 48.5 in June. In particular, export demand for German goods fell steeply as many of its continental trading partners have also contracted.
On Tuesday, the German ZEW survey measuring German economic sentiment fell at its fastest rate since 1998 to -16.9 from 10.8 registered in May. The rapid deterioration of business confidence in Germany provides further evidence that falling exports are beginning to take their toll.
Yields Reach Record-High in Spanish Debt Auction
This week, Spain sold EUR 2.2 bn of five-year bonds at a record-high average yield of 6.07%. Comparably, the Spanish debt auction in May for similar five-year bonds required only a yield of 4.96%. Following this debt auction, Italian Prime Minister Mario Monti raised the possibility of using the region's bailout funds to purchase distressed sovereign debt, like Spain's, when yields become unsustainable. To date, however, eurozone officials have yet to rally behind this idea en masse.
US Jobless Claims Decline, Fail to Meet Expectations
Data released this week from the US Bureau of Labor Statistics showed that initial jobless claims declined to 387,000 following last week’s upward revision. The figure fell short of economists’ expectations for a decrease in jobless claims near 383,000. To adjust for inter-week volatility, most economists look at the trend in jobless claims by using a 4-week moving average. Following this week's data release, the 4-week moving average of jobless claims increased 3,500 positions to 386,250--the highest mark in the past six months. Sustained jobless claims reports below 400,000 tend to indicate employment growth. However, Fed officials recently revised their unemployment rate forecasts up from 7.8-8.0% by year-end to 8.0-8.2%.
