I seriously do not understand how anyone could have thought “Operation Twist Again”, could do anything meaningful. What good can another 20 or even 50 basis point lowering on the 10-year rate do?
Operation Twist will not spur lending because banks are capital impaired and businesses have no reason to expand. Moreover, the flattening of the yield curve will hurt, not help bank profits.
Nonetheless here is something I picked up from ZeroHedge the other day and wanted to comment on.
ZeroHedge reports Goldman Is Surprised By The Market’s Reaction
The yield curve did indeed twist–with the difference between ten-year and two-year Treasury yields flattening 11bp to 166bp. But other asset prices responded in ways atypical for monetary easing: the dollar rallied, equities slumped, and commodity prices fell. On net, our GS Financial Conditions Index actually tightened on the day, certainly not the reaction Fed officials would have been hoping for. Given the market most focused on the implications of the “twist” did react in the way we expected, we are surprised at the behavior of other markets; one possibility is that the unconventional move will take more time to digest in markets less familiar with its likely method of action. Indeed, we found in prior work that the equity and foreign exchange markets seemed to lag behind the fixed income market in pricing in asset purchases.
The above snip is a Goldman quote. I am quite certain Zero Hedge was not surprised by the reaction.
However, most market participants were surprised by the announcement. How else can one explain the reaction?
The market clearly expected more from Bernanke. However, I explained why more was not coming on Tuesday in Six Things the Fed May Announce Tomorrow (But Likely Won’t); Would Any of Them Matter? Gaming the Reaction.
Since neither the Fed nor the ECB did anything substantial, and most thought they would, why shouldn’t this have been a sell the news phenomena?
Academic Gibberish from Goldman Sachs
Check out this chart from Goldman Sachs.
I am not going to bother explaining that chart because it is academic gibberish. More importantly, even were it not academic gibberish, the idea that somehow the Fed’s move would spur a positive reaction from the markets is ludicrous.
Surprise, Surprise, Surprise
There is absolutely nothing to be surprised about the reaction. Yet, Goldman Sachs was surprised.
Speaking of surprises, I will be surprised when a majority of Goldman Sachs recommended ideas work. I will also be surprised if Goldman Sachs did not make money on the day, perhaps even betting against its own advice.
Mike “Mish” Shedlock
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