Financial markets remained in the 'risk on' mode as investors continued to be thrilled by the FOMC minutes. Added to the optimism was the news that German Chancellor Merkel's cabinet had approved to support expansion of the EFSF. On the macro front, US factory orders and Chicago PMI came in better than expected. These also helped alleviate market worries over a recession. Wall Street rose with DJIA and S&P 500 gaining +0.46% and +0.49% respectively. In the commodity sector, the front-month contract for WTI crude oil fluctuated between gains and losses before closing largely flat at 88.81. The equivalent Brent crude contract traded above 115 for the first time since August 3 and ended the day at 114.85, up +0.73%. Gold faltered after failing to touch 1850 and settled flat at 1831.
Hopes of QE3 rekindled after the minutes for the August FOMC meeting showed that a few members believed the Fed should do more than just announcing that interest rates will stay exceptionally low at least until mid-2013. Chicago Fed President said on earlier in the week that he is in favor of some of the 'most aggressive policy action' as he is 'nervous about the economic recovery'. Sort of echoing Evans' tone, Atlanta President Dennis Lockhart said recent weakness in economic data and 'rising concern about chronic slow growth', he did not think 'any policy option can be ruled out at the moment'. The focus is now on the September FOMC meeting which is extended to 2 days for fuller discussion on possible easing measures.
A ray of light is seen on the debt issue in the Eurozone after Germany showed supports on the new EFSF which was agreed among European leaders on July 21. German Chancellor Merkel's cabinet backed the new EFSF which is given purchasing power on sovereign bonds. Germany's share in the loan guarantees is raised to 211B euro from 123B euro. Members of the GCD party are confident that they can secure a coalition majority to get approval on September 29. According to Finance Minister Wolfgang Schaeuble, 'the German government has strengthened its determination to secure the stability of the euro with a powerful set of tools at the Eurozone level'.
As far as the dataflow is concerned, Chicago PMI fell -2.3 points to 56.5 in August, better than consensus of 53.5, while factory orders grew +2.4% in July after dipping -0.8% a month ago. Initial jobless claims probably fell -8K to 409K in the week ended August 27. ISM manufacturing index might have slipped to 48.5 (contractionary territory) in August from 50.9 in July.