The Fed's minutes disappointed markets. After a fairly uneventful London session for major equities, currencies and interest rates, the FOMC minutes revealed no strong consensus regarding the threshold for further easing. A 'few' members believed more stimulus would be necessary but 'several others' felt any further accommodation was dependant on the economy weakening. The S&P500 fell immediately after the minutes were released and is currently down 0.3%. Commodities fared much better (CRB index +0.7%, oil +2.3%, copper +0.9%, gold +0.4%), helped by the Chinese Premier's comments indicating further easing ahead. US 10yr treasury yields were rangebound between 1.49% and 1.51%, apart from a brief dip to 1.45% following a 10yr auction awarded at a record low 1.46%. Eurozone peripheral bond yields fell.
The US dollar index (DXY) ground higher in London, surging to a 22-month high following the FOMC minutes. EUR conversely was on the back foot throughout, falling from 1.2297 to 1.2213 – a fresh two-year low –the German court's stalling of the ESM bailout process weighing on sentiment towards the currency. USD/JPY rose sharply from 79.14 to 79.76 on rumours ahead of the BOJ meeting today. AUD made an intraday peak of 1.0281 during the London morning and then fell to 1.0219, the FOMC result worth around -50 pips. NZD peaked at 0.7999 and fell to 0.7945. AUD/NZD ground higher from 1.2840 to 1.2860.
Economic wrap
US trade deficit narrowed by nearly $2bn to $48.7bn in May as imports fell 0.7%, a further correction from March's 5.2% surge. Exports rose a marginal 0.2% after falling 0.9% in April. Adjusting for prices the real goods deficit so far in Q2 is more than 2% higher than in Q1 pointing to a renewed drag on GDP growth from net exports in the Q2 figures due 27/7. Note that report will include annual GDP revisions based on more accurate source data such as tax records which last year saw the growth profile up to March 2011 revised lower. Our preliminary forecast for Q2 GDP growth is 1.2%, which would be the second weakest of the three year recovery after Q1 2011's 0.4% annualised. US wholesale inventories rose 0.3% in May, constrained by a lower value of petroleum stocks due to falling prices. US FOMC minutes to the June 19-20 meeting due out this evening.
Spain announces new austerity measures, despite delaying by a further year to 2014 the 3% of GDP budget deficit reduction target. The 4th austerity package of the 7 month old administration included VAT hikes and lower unemployment benefits, breaking pre-election pledges not to implement such policy changes, but considered necessary to slash 3.3 ppts off the deficit over the next two years from this year's 6.3% of GDP shortfall. Spain has an even lower tax to GDP ratio than Greece so there is an argument in favour of using taxation to meet the deficit target but VAT hikes not accompanied by income tax cuts will risk even lower consumption, especially given the govt is also reducing unemployment assistance. Put simply, they are taking money away from the poor and increasing the tax (except the lowest 4% rate) on things they buy. It might satisfy the officials in Brussels but it won't enhance the growth prospects for the economy which is now likely to be in recession beyond 2013. Expect these numbers to be revisited time and again, as has been the case with Greece. They are unachievable without external assistance, which PM Rajoy explicitly wishes would come in the form of ECB action to hold down the sovereign's borrowing costs.
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