Tuesday, September 20, 2011

While the overnight action was decidedly negative things have turned up in the US on hopes we'll get more clarity from the Fed on what it plans to do to improve liquidity in the US economy this week.  In other news,

* Housing starts missed expectations and dipped to a 3 month low. 
* Italy's rating was cut by S&P and their outlook remains negative.
* China has been playing cat and mouse with the US and Europe.  Last night they threw a wrinkle in the "China will save Europe" story by saying "EU DEBT CRISIS MAY RAISE CHINA TRADE FRICTION."

However, today (and tomorrow) the markets will be fully focused on the Fed.  The current expectations are that the Fed will work to raise 10yr rates and lower 30 yr rates - through operation TWIST (I'll give you the 30 second breakdown on TWIST if it comes to pass).   While it is considered a slim possibility there is an outside shot at outright purchases of $200-$400 billion of bonds.  If that were to occur you'd get a brand new round of skyrocketing stocks, food/gas inflation and dollar depreciation.  Again, that has a very, very small chance of occurring but we have to keep our eyes open to all of the possibilities. 

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