While you were sleeping: Fed keeps bond purchase target, extends cut-off

Thursday 13th August 2009

The Federal Reserve kept its target for bond purchases at US$300 billion, extending the programme for a month as the world’s biggest economy shows signs of emerging from recession.

US Treasuries fell amid disappointment the Fed didn’t announce an increase in purchases. The US dollar gained against the yen after the central bank said the economy was leveling out. It kept its interest rate target at zero to 0.25%, as expected, and said rates would stay low for an extended period.

“Information received since the Federal Open Market Committee met in June suggests that economic activity is levelling out. Conditions in financial markets have improved further in recent weeks,” the policy makers said in their statement.

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilise financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability,” the statement said.

Bond purchases were extended through October from the original end date of September.

The yield on 10-year Treasuries climbed 5 basis points to 3.72% and the yield on the 30-year bonds jumped about 10 basis points to 4.53%. Bonds also fell after the Treasury’s auction of US$23 billion of 10-year notes drew weaker demand than was expected.

The dollar strengthened 0.2% to 96.13 yen as traders took the Fed’s statement as a positive signal about the US economy.

The US economy will expand at least 2% in the four straight quarters through June, according to the median of 53 forecasts in the monthly Bloomberg News survey.

The US trade deficit widened less than expected in June, led by an increase in exports – a sign that economies around the global may be improving.

The trade gap rose 4% to US$27 billion, according to Commerce Department figures. Exports rose 2% on shipments of computer chips and aircraft engines. Imports climbed 2.3%, on oil costs.

The US budget deficit reached a record in the first 10 months of the fiscal year, reflecting weaker tax revenue and increased spending on fiscal stimulus measures. The budget shortfall so far this year is US$1.27 trillion, almost three times the US$389 billion at the same time last year. The fiscal year ends September 30.

The decline in US home prices accelerated in the second quarter, falling by a record 15.6% as foreclosures rose, according to the National Association of Realtors. The median price of an existing single-family home tumbled by US$174,100, the most since records began in 1979. Total sales rose 3.8% in the second quarter to an annual rate of 4.76 million, seasonally adjusted, from the first quarter.

Stocks rose on Wall Street. The Dow Jones Industrial Average gained 1.3% to 9361.61 and the Standard & Poor’s 500 advanced 1.2% to 1005.81. The Nasdaq Composite rose 1.5% to 1998.78.

Travelers Cos. climbed 3.3% to US$46.43 after its credit outlook was raised to ‘positive’ by Standard & Poor’s.

Toll Brothers jumped 14% to US$23.42 after the biggest US builder of luxury homes posted better-than-expected sales. Retailer Macy’s Inc. rose 6% to US$16.40 after raising its forecast.

Exxon Mobil Corp. rose 1.4% to US$69.11 after crude oil for September delivery rose 1.1% to US$70.20 a barrel.

Earnings per share at the 453 companies on the S&P 500 that have released results since June 17 have beaten estimates by an average 11%, according to Bloomberg. Profits tumbled by an average 30%, about twice the 16% decline in sales.

Gold futures for December delivery fell to US$946.05 an ounce in New York.

In Europe, the Dow Jones Stoxx 600 Index gained 1% to 228.65, helped by better-than-expected earnings.

The UK’s FTSE 100 rose about 1% to 4716.76 as the Bank of England forecast the end of recession by the third quarter of next year and Governor Mervyn King said inflation will probably stay below the BOE’s 2% target until the end of 2012.

UK jobless benefit claims rose by a smaller-than-expected 24,900 last month, according to the Office for National Statistics.

Germany’s DAX 30 gained 1.2% to 5350.09 and France’s CAC 40 gained 1.5% to 3507.24.

E.ON gained 5.4% after the utility posted a gain in first-half profit and said demand for power in France, Spain and Italy may help limit the decline in 2009 earnings.

Nestle SA fell 4% after reporting its first decline in profit fir six years, with weaker than expected sales.

Businesswire.co.nz

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