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Fed Announces Expansion of QE3 by Purchasing Treasuries

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Today's financial recap and tomorrow's financial outlook.

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This morning, Greece finalized the voluntary bond buyback with private creditors. The final purchases totaled a face value of 31.9 billion euros, a little more than the 30 billion euros that was originally targeted. Because of this, Greece will need to seek an additional 1.29 billion euros from the EFSF. The majority of bonds that were bought back came from domestic banks and pension funds. The remaining holders include foreign banks and hedge funds.

Today was the long-awaited unveiling by the Fed of the second part of QE3. The Fed announced that it would continue buying Treasuries at a monthly pace of $45 billion. The Fed also announced that it would target a long-term rate of 2.5% for inflation and 6.5% unemployment before it would begin to tighten monetary policy conditions. While this was not a huge change in the dovishness of the Fed, it was not expected that they would move to a economic threshold system so soon from a future date.

The main change was the maturity distribution at which the Fed was buying. By moving to a 4- to 30-year distribution, this would allow the long end of the Treasury curve to steepen. Thus, the Treasury curve steepened as the long end sold off and the front end to the belly rallied.

Research in Motion (RIMM) rallied heavily as images continued to leak regarding the progress of the BlackBerry 10 system. RIM's stock finished the day 4% higher, capping a 60% rally over the past month.

Action after the FOMC's announcement focused on selling in both stocks and bonds as the long stocks for fiscal cliff resolution and long bonds for QE4 was unwound. The S&P 500 closed the day flat after reaching an intraday high of 10 points. The one notable action in Treasuries was the abnormally large bid from direct bidders in the 10-year auction completed at 11:30 a.m. EST.

Tomorrow's Financial Outlook

Tomorrow in US economic data, weekly initial claims will be reported in the morning as well as retail sales. Last week, jobless claims declined to a weekly rate of 370,000, near the 4-week moving average and in the average range pre-Hurricane Sandy. Retail sales, which would be largely affected by Hurricane Sandy, are expected to rise to a monthly rate of 0.4% from last month's -0.3%. Lastly, the Treasury will be selling 30-year bonds at 1:00 p.m. EST.

Globally, Australia will be announcing and inflation expectations and the Swiss national bank will release its monthly rate decision. Because Swiss banks over the past two weeks have begun charging customers to hold deposits, it is possible that we may see something new from the central bank.

In earnings, Ciena (CIEN), Hovnanian (HOV), Adobe (ADBE), Pier 1 Imports (PIR), and Verifone (PAY) will report.

Twitter: @Minyanville

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No positions in stocks mentioned.

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