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Wednesday, December 12, 2012

The ‘Fiscal Cliff’ negotiations are reportedly making progress, but a deal may not come through before the last minute. Judging from the market’s behavior thus far, investors don’t seem to be overly concerned about the delay, expecting the political leadership to come through in the end. Market participants also expect the Fed to come through with additional stimulus at the conclusion of the two-day FOMC meeting today, replacing the expiring ‘Operation Twist’ with a new round of Treasury bond purchases.

Minutes of the last FOMC meeting and the official post-meeting statement indicated that the central bank would be open to additional monetary easing measures if the labor market did not improve. And notwithstanding the upward revision to third quarter GDP, largely a function of non-material items, the economy and the labor market remain weak. This forms the basis for the market’s expectation of a new round of bond purchases as the existing duration extending ‘Twist’ program comes to an end at the end of the month.

Fresh purchases of Treasury bonds in magnitudes equivalent to the expiring program will effectively be QE4, a significant ramp up in the Fed’s stimulus measures. This would also indicate that the Fed perceives the economy weak enough to be needing such help. That said, there is room for disappointment from the market’s perspective, particularly with respect to the size or duration of the new program. The Fed has also been thinking about replacing communication about its exit program from the current explicit calendar period (mid-2015) to specific economic targets. The issue was reportedly debated at length in the last meeting as well, though nothing concrete came out of it. We will most likely not see a resolution of that issue today either, but this definitely something on the Fed’s to-do list.

In corporate news, Sprint (S - Analyst Report) is reportedly in talks to acquire the remaining 49% of Clearwire Corp that it doesn’t already own. The move is seen as improving Sprint’s competitive position by giving it access to Clearwire’s vast spectrum reserves, but is complicated by the carrier’s pending acquisition by Japan’s Softbank.

Sheraz Mian
Director of Research

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