June 20: FOMC Expected to Take Concrete Action

Leaders of the Group of 20 (G-20) developed and developing nations failed to come up with any concrete actions in their two-day summit meeting in a beautiful Mexican resort town. But hardly anyone expected the Germans to agree to anything tangible ahead of the Euro-zone summit scheduled for later next week in Brussels. There is no shortage of workable ideas that could turn the tide, ranging from a banking union to using the permanent bailout fund to directly buy the government bonds of Italy and Spain. The politics and process of implementing any of these ideas will likely be drawn out, but coming up with a roadmap at next week’s Brussels summit will be a big achievement by itself.

Few may have expected the two-day G-20 summit to take any concrete steps, but pretty much everyone expects the two-day FOMC meeting concluding this afternoon to come out with something tangible. The Fed is expected to keep the monetary stimulus party going by announcing an extension of the current Operation Twist, which ends later this month. Other options include a fresh bond-purchase program or further extending the Fed’s current guidance of keeping interest rates near-zero through 2014.

Hardly anyone can credibly claim that more Fed stimulus will do any real good to the economy, given where interest rates are already. The only rationale for more action is that the markets have been expecting it and the Fed doesn’t like disappointing Mr. Market. The strong market rally of recent days, despite negative headlines from Europe and growing signs of loss of momentum in the U.S. and Chinese economies, reflects these positive expectations. Given these gains, Mr. Market may find the actual announcement of a Twist extension to be rather underwhelming. Such a response will get interpreted as the age-old buy-the-rumor-sell-the-news narrative.

In corporate news, we have entered the pre-announcements season and we got two negative announcements this morning - from Proctor & Gamble (PG) and Adobe Systems (ADBE) – with Europe a common factor in both. Idenix Pharmaceuticals (IDIX) shares will likely be in the spotlight after the company announced positive results of its hepatitis C treatment.

Crude Inventories are scheduled to be released today at 10:30 AM EST. For the week ending June 8, crude inventories decreased by 0.2 million barrels from the previous week to 384.4 barrels.