SCOREBOARD: Ben's bonds

Speculation was rife that the Fed was closer to doing it after they expressed public admiration for the success the BoE has had in their program – so this morning they announced they would, indeed, purchase $US300 billion worth of longer-dated treasuries within the next six months from next week.

The Fed is also expanding its MBS purchases by $US750 billion and agency debt by $US100 billion for an overall $US1.1 trillion expansion of the balance sheet (read printing money). The rest of the Fed statement concerned itself with growth, which they expect will be weak in the near-term before a gradual recovery; and then inflation which they think will remain subdued. It's important to note that, while the statement was bearish on growth, they took out the comment suggesting that the risks to the outlook were significantly to the downside. Otherwise, they kept the target Fed funds rate between 0 and 25bps (the actual rate has been more like 25bps than 0 though).

The market reaction to the Fed's decision was ferocious. The treasuries curve flattened by 24bps to 174bps as bonds rallied hard. Volume through Brokertec has exploded with activity in all on-the-run coupons heavy, the 2s, the 5s and the 10s exceptionally so. Dollar-flows are sizably positive across the board. The 5s and the 10s were bid hardest, yields dropping by 42bps and 46bps respectively, to a yield of 1.53 per cent and 2.52 per cent. The yield on the 30-year dropped by about 24bps to 3.56 per cent while the 2s fell 22bps to 0.79 per cent. Aussie futures contracts were no less affected, the 3s rallying 15bps to 96.95 while 10s were up 23bps to 95.8. On the short-end, euro dollars rallied about 15bps to 98.81, while the June Bill contract was up 7bps to 97.33.

Greenbacks were smashed, off almost five big figures against the Euro (which rose to 1.3493), 240pts against sterling, and the AUD and NZD gained about 180 to 0.6788 and 0.5468 respectively. Commodities were generally weaker although gold had a good run, up another $US30 to $US944.9.

Equities were having a pretty sluggish session up till the FOMC decision, the Dow was off 138pts at one stage and the S&P500 traded 1.3 per cent lower. Stocks went bid after the decision though and from the low, the Dow was up 229pts while the S&P put on 3.7 per cent. At the bell, the S&P500 was 2.1 per cent higher (794) reflecting a strong 10 per cent gain in financials (though materials and utilities also outperformed). Energy stocks posted a more modest 0.8 per cent rise though the oil price was flat at $US49.17. The Dow closed up 91pts (7486), the Nasdaq was up 2 per cent, while the SPI was 0.9 per cent higher.

In other news and data, US inflation was stronger than expected rising by 0.4 per cent (compared to an expectation of 0.3 per cent). Core inflation too was higher, rising to 1.8 per cent annually from 1.7 per cent. Still on the US, mortgage applications rose by 21 per cent in the week to March 13. It's still mostly refinancing activity though purchases rose also. Across the sea, UK claimant count rose by 138,000 in February (84,000 was expected). The 3-month ILO unemployment rate rose to 6.5 per cent from 6.3 per cent. Finally on the UK, the BoE minutes showed a unanimous vote for a 50bps cut and the £75 billion asset purchases, though they did discuss a higher limit.

I think the main focus for Australian data today will be the RBA speech at 0750 AEDT and then dwelling unit commencements. The speech is by assistant governor Edey and it's on the financial crisis and its effects – he sometimes makes some market moving comments so it's worth keeping an eye on. The dwelling unit data is for the fourth quarter and most likely they'll be negative given approvals data has been so weak. Otherwise the Westpac ACCI first quarter survey of industrial trends and merchandise imports are due. None of it is usually market moving. Then there is the AOFM Treasury note tender, $300 million each of the 19 June and 18 Septembers. In the US, the dataflow includes the weekly jobless claims number, the Philly fed index and a Fed speaker. European data Eurozone industrial production.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.