While you were sleeping Fed leaves markets wanting

Thursday 2nd August 2012

The Federal Reserve said that US economic activity had "decelerated somewhat" since its policymakers last met but failed to provide fresh clues on potential action to revive growth.

"The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually," policymakers said in a statement released at the end of their two-day meeting.

"Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."

While few had anticipated the Fed to announce fresh measures today, most had hoped for new indications as to when they might provide the aid they are ready to give as they have mentioned repeatedly.

"The market had gotten ahead of itself a bit in terms of what the Fed would do," Steven Ricchiuto, chief economist at Mizuho Securities in New York, told Reuters. "Markets will be disappointed, as they should be. But it did seem it would at least manage expectations. They did absolutely nothing here. It suggests there is a lot of internal debate going on in the Fed."

Wall Street gave up earlier gains following the statement. In late afternoon trading in New York, the Dow Jones Industrial Average slid 0.23 percent, the Standard & Poor's 500 Index lost 0.10 percent and the Nasdaq Composite Index fell 0.19 percent.

Indeed, the latest data released today show further signs of a cooling in the US economy.

Manufacturing unexpectedly shrank in July for a second month. The Institute for Supply Management's factory index was 49.8 last month, barely budging from June's three-year low.

In Europe, the Stoxx 600 Index finished the session with a 0.5 percent increase.

There were promising signs that helped push yields on Spanish and Italian bonds lower.

Italian Prime Minister Mario Monti told Finnish newspaper Helsingin Sanomat that the country doesn't need a bailout.

Meanwhile, Spain is working hard to secure goodwill from the euro zone's biggest economy. Spain's Economy Minister Luis de Guindos is pushing for additional budget cuts after Germany indicated such a move would be rewarded by bond-market assistance, according to Bloomberg, citing two people in Madrid.

German bunds remain popular. The nation sold 3.35 billion euros of five-year notes at an average yield of 0.31 percent, the lowest on record, according to the Bundesbank.

Most EU bond investors opted for the sidelines ahead of tomorrow's meeting of the European Central Bank. President Mario Draghi has heightened expectations of fresh measures to contain the spiraling EU debt crisis.

BusinessDesk.co.nz

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