While you were sleeping: Fed maintains policy, Treasuries fall, dollar gains

Thursday 25th June 2009

The Federal Reserve kept monetary policy unchanged after its two-day meeting, saying the US recession is abating while inflation will remain subdued for an extended period.

The US central bank kept its key interest rate target in a zero to 0.25% and said rates would stay unusually low for some time. The decision was unanimous.

The Fed maintained its US$1.75 billion programme to buy longer-term US government debt and mortgage-related securities. Total assets on the central bank’s balance sheet rose by US$1.17 trillion over the past 12 months to US$2.07 trillion.

“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing,” the Fed said in a statement on its website. “Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” it said. “Conditions in financial markets have generally improved in recent months."

US Treasuries fell after the Fed kept its debt-purchase programme unchanged and omitted any mention of an exit strategy from its financial and economic support measures, as European leaders have flagged.

The yield on two-year notes jumped 9 basis points to 1.19% while the 10-year yield climbed 7 basis points to 3.7%. The 30-year Treasury yield rose 8 basis points to 4.44%.

Traders see a 40% probability that the central bank will lift interest rates by the end of the year, according to Federal-funds futures contracts on the Chicago Board of Trade. That’s down from 75% at the start of June.

Commerce Department figures showed an unexpected jump in US durable goods orders last month. New orders rose by 1.8% in May, the third straight gain. Economists had expected a decline of 0.6% in the latest month, according to a Reuters survey.

New orders excluding transport rose 1.1%, paced by a 7.7% advance in machinery orders. Non-defense capital goods orders excluding aircraft, a measure of business spending, rose 4.8%.

US sales of single homes fell 0.6% to an annual pace of 342,000 in May, a separate Commerce Department report showed.The median sales price rose to US$221,600 from US$212,600. Figures from the Mortgage Bankers Association showed mortgage applications rose from a seven-month low last week. Its seasonally adjusted mortgage applications index rose 6.6%.

Stocks on Wall Street were mixed. The Dow Jones Industrial Average slipped 0.3% to 8299.86, with Boeing Co. falling 5.8% to US$41.32 after announcing further delays to test flights for its Dreamliner plane.

The Standard & Poor’s 500 rose 0.7% to 900.94, led by an 11% gain to US$24.48 by Legg Mason. Oracle Corp. climbed 7% to US$21.26 after the software maker posted better-than-expected quarterly earnings.

The Nasdaq Composite rose 1.6% to 1792.34.

Citigroup, the recipient of US$45 billion of government aid, plans to raise base salaries by as much as 50% after cutting annual bonuses, Bloomberg reported, citing a person familiar with the plan said. Investment bankers and traders will get the biggest increases. The bank also plans to award stock options in an effort to retain key staff, the report said.

The European Central Bank made a record injection of 442 billion euros of one-year funds into money markets, its first such money market operation with a term as long as one year. The move may encourage banks to make more long-term loans to companies and consumers.

Shares rose in Europe after the US durable goods figures and after the Organization for Economic Cooperation and Development lifted its forecasts for the global economy. The Dow Jones Stoxx 600 Index gained 2.4% to 206.33.

Rio Tinto jumped 5.6% and BHP Billiton gained 4.7% as the price of metals rose. Anglo American climbed 10% and Xstrata gained 5.5%.

The OECD raised its economic forecasts for its members for the first time in two years. Their combined economy will contract 4.1% this year, better than the 4.3% rate it predicted in March. In 2010, growth will be 0.7%, up from the 0.1% pace of growth it previously predicted.

UK railroad company Stagecoach Group rose 8.5% after posting better-than-expected earnings. Deutsche Bank rose 6.6% after Citigroup raised the German lender to ‘hold’ from ‘sell.’

Germany’s DAX 30 rose 2.7% to 4836.01 and France’s CAC 40 gained 2.2% to 3184.76. In the UK, the FTSE 100 rose 1.2% to 4279.98.

US crude oil slipped 60 cents to US$68.72 a barrel, reversing an earlier gain.

Copper futures for September delivery rose 2.9% to US$2.277 a pound on the New York Mercantile Exchange. Gold futures for August delivery edged up 0.4% to US$924.30 an ounce.

The US dollar strengthened to $1.3936 per euro from $1.4077 and rose to 95.55 yen from 95.22. The euro traded at 133.14 yen from 134.04.

Buyout firm Kohlberg Kravis Roberts & Co said it plans to merge into its Amsterdam-listed fund, which is listed on the Euronext exchange, following the lead of Blackstone Group in seeking to become publicly traded.

KKR kept open the possibility of a New York listing.

China's Sinopec Group agreed to buy Toronto-listed Addax Petroleum for C$8.27 billion, to add to its overseas energy reserves. Sinopec beat out rival bidder Korea National Oil by agreeing to pay C$52.80 a share, a 47% premium on the target’s share price on June 5.

Businesswire.co.nz

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