Ashraf Laidi on AlArabiya; US GDP, Types of QE & Eurozone, April 28, 2012

Apr 30, 2012 2:20
Ashraf tells AlArabiya last week's release of advanced US Q1 GDP was the best of both worlds for the Fed; sufficiently weak to unveil a new round of asset purchases (positive for stocks & risk appetite) and sufficiently strong to offset any purchases with sales on the short-end of the yield curve (sterilized version a la Operation Twist). With core personal consumption expenditure index (inflation gauge) regaining the 2% figure at 2.1%, the argument for a sterilized version of purchasing mortgage backed-securities is bolstered further. The 2.2% GDP was lower than expectations of 2.6% and whisper number of 3.0%, but close enough to trend growth rate of 2.5%. Also on the positive side, personal consumption expenditure rose 2.9%, the highest since Q 2010.Slowing contribution from private domestic investment and private inventories was offset by an improving contribution in net trade, government spending and personal consumption. Euro resilience to Spain downgrade builds further on softer than expected US GDP. Markets require more out-of-the-box catalysts in order to destabilize the EURUSD below its 1.3100 floor. As long as more FOMC members (more than before) have shifted to keeping low rates until 2014), the euro requires a more destabilizing factor (USD-positive) in order to break below the key floor. The FOMC will most likely trigger a sterilized version of QE, namely Operation Twist 2, which involves keeping long rates down and short rates supported in order to further help out the housing market.

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