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Financial Markets: Headlines for October 20

October 20, 2011

EQ US equity indices fell after publication of the Fed’s Beige Book as investors focused on more cautious views toward the outlook although the regional reports confirmed ongoing economic expansion in September; the Dow fell 0.6% to 11504.6 and the S&P lost 1.3% to 1209.88 as technology shares weighed (-2.1%); Apple’s Q3 earnings missed average estimates (AAPL, -5.6%, $398.62); European bourses closed mixed again as uncertainty about the outcome of Sunday’s leaders’ summit remained high; French President Sarkozy traveled to Frankfurt for high level talks with German Chancellor Merkel, ECB Pres. Trichet and others, amid reported disagreement over how to increase the firepower of the EFSF; Stoxx 50 moved in a narrow range and gained 1.0% on Wednesday led by financials (+3.3%)

FX The euro fell during the US session, erasing an earlier gain to 1.387, and ended flat on the day at 1.375; EUR/GBP fell 0.4% to 0.872 and the pound was up broadly versus other major currencies as well, despite the dovish tone of the BoE minutes and unanimous vote to restart QE; Cable rose 0.4% to 1.577, up 0.2% from a week ago

FI USTs ended little changed but yields fell slightly in the belly of the curve during the US session; the 5yr yield declined 2bps to 1.042% and was down 5bps from a week ago; the 30yr yield ended flat at 3.176%; yields were up across the Euro area core and periphery; the German Bund yield rose 5bps to 2.056%; the Spanish 2yr underperformed among non-programme countries and was the highest since 5Aug, up 10bps to 3.871% after the Moody’s downgrade; however, the iTraxx W. European sovereign CDS index fell for a 3rd consecutive session, down at 324.5 vs. 337.6 on Friday

$ Fed’s Beige Book confirmed that economic activity continued to expand in September, across all districts, although the pace was “modest or slight” and the outlook toward business conditions continued to weaken; conditions in the labor market were little changed, on balance, but NY reported a pull back in hiring with layoffs expected in months ahead due to worse conditions in financial sector; 5 districts noted that some sectors saw a skills-mismatch problem when trying to hire; consumer spending up slightly in September led by autos and tourism; 3 districts reported retailer reluctance to build inventories ahead of the holidays; however, in most districts businesses’ capital spending plans continued as planned; “manufacturing & transportation activity increased since the last report in most districts”; in real estate & construction there were some signs of modest improvement in single-family and commercial building and leasing activity; financial activity weakened -“loan volumes were either flat or down slightly in most Districts”; standards still “described as tight for may classes of borrowers”; “cost pressures eased in the majority of Districts,” although many districts reported pass through into retail prices of higher costs for food and cotton

$ Fed’s Plosser (voter) is not concerned about inflation in the short term: "when the business cycle improves and the reserves flow in the economy, then that is fuel for inflation. As long as we can control that, and as long as the public believes that we can control that, it will not cause inflation, also in the future."

$ Fed’s Rosengren (non-voter) is in favor of tying the FOMC’s policies to unemployment and inflation markers

$ US consumer prices rose 0.3%MoM in September, in line with the consensus forecast, versus +0.4% in August; this brought the annual CPI to 3.9%, the highest since Sep’08 (+4.9%); the core CPI ex-energy & food posted the smallest monthly increase since Oct’10, up 0.1% vs. +0.2% previously; the annual core CPI stabilized at +2.0%; energy prices jumped 2.0%MoM in September vs. +1.2% previously; food prices were up 0.4% vs. +0.5%; apparel prices declined 1.1% after 5 straight months of increases

$ US housing starts jumped 15.0%MoM in September vs. a revised decline of 7.0% in August (originally -5.0%); this brought the annualized pace to 658k, the highest since Apr’10, with most of the increase led by multi-family starts (+51.3% to 233k); single-family starts rose 1.7%MoM to 425k after declines in the previous 2 months

€ Unnamed EU officials denied the Guardian report that a deal has been reached to leverage the EFSF to €2trn – Reuters

€ French FinMin Baroin said that French officials remain in favour of getting the EFSF a banking license so that it could leverage its capital at the ECB; Austrian FinMin said she is in favour of the EFSF providing insurance but more work is needed on the models

€ German Chancellor Merkel said that past errors in the Eurozone cannot be resolved in one stroke; changes to EU treaties are not taboo

€ Greek PM Papandreou won a preliminary vote on the new round of Greek austerity measures

€ The European Commission raided several firms active in derivative markets linked to Euribor, on suspicion of antitrust violations

€ Moody’s cut Spain 2 notches late on Tuesday to A1 and left a negative outlook; S&P cut ratings on 24 Italian lenders

€ EC President Barroso: “The decisive intervention of the ECB in secondary bond markets was and still is a critical element in securing financial stability in the euro area”

€ Overnight borrowing from the ECB’s emergency facility was the most in more than 7 months, at €4.8bn on Tuesday vs. €2.4bn Monday; the ECB again lent $500m to 1 firm in its weekly USD liquidity operation

£ The BoE MPC voted unanimously to increase QE by £75bn in October and hold Bank Rate at 0.50%; “there had been significant downside news about the factors influencing the outlook for demand in the two months since the August inflation report… The scale of the downward reassessment of the medium-term inflation outlook suggested that substantial further asset purchases were appropriate”; some members expressed preference for a “larger monetary stimulus than otherwise” given the substantial downside economic risks; the MPC considered an increase in the range of £50-100bn

£ UK BoE Deputy Gov. Bean said there is “light at the end of the tunnel for consumers”; the bigger risk is that inflation will be too low in the medium term, not too high; MPC member Broadbent expects real income growth to resume in 2012 as inflation fades; he does not expect a dramatic improvement in the economy and hopes European policymakers will address “fundamental imbalances”; MPC member Posen said that the economy is moving fast “in a downward direction” and that the MPC has “to be one step ahead in terms of policy”; there is more monetary “ammo” available in more asset purchases; the spike in inflation is “very temporary” and will “come down pretty fast” in H1

€ Eurozone construction output rose 0.2%MoM in August versus an upwardly revised increase of +1.8% in July (originally +1.4%); output was up 2.5% from a year ago vs. +2.0% in July

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