Stocks began today's trading session with a rather encouraging pop, putting the Dow up about 40 points. As the day progressed, equity markets have been able to hold on to those gains mainly in anticipation of the Fed policy announcement, which many believed to be Quantitative Easing part IV.
Quite interestingly the Street was right; the Fed will effectively put forth yet another round of quantitative easing. As it stands, the U.S. economy has been experiencing rather increasing headwinds, which have been resulting in low gross domestic product growth and even lower growth expectations. As such, it is understandable that the Fed is moving to anticipate a slowdown and provide some form of liquidity to promote economic growth. However, with the Fed funds rate already close to zero, the Fed has less ammunition to fight with, and let's not forget that while inflation is under control it is still rather tight.
Nonetheless, the Fed still has a few bullets left, and as such it will let "Operation Twist" end as scheduled this year but will commit itself to monthly purchases of $45 billion in treasuries on top of the $40 billion per month in mortgage-backed bonds it started buying in September. The idea behind Operation Twist was to drive down the interest rate on long-term bonds, which serve as a reference in the pricing of auto loans, mortgages, and other longer-term loans to consumers and businesses. This past September, the Fed increased liquidity by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month for an indefinite length of time. So today's decision means that our economy will receive an $85 billion monthly injection to stimulate growth. And yes this too will be indefinite as policymakers repeated their pledge to keep buying bonds until the labor market outlook improves substantially.
Quite surprisingly, the Fed said it will likely keep official rates near zero for as long as unemployment remains above 6.5% with inflation below 2.5%. The effect of the Fed announcement has been excellent, resulting in a Dow jump of over 50 points, leaving the index up over half a percent.
Chinese Solar Shines
Check out the heat in Chinese solar stocks, which blazed higher on Wednesday, after various reports of government support for the industry. To be sure, the industry has been down in the dumps of late as softer global demand and dropping prices weigh on business. Well, as it turns out China remains quite committed to cultivating a strong solar industry. With $1 billion already having been laid out by the government in the first half of this year to subsidize solar projects, Xinhua News is reporting that China is set to pledge another $1.1 billion. Other news items in connection with this story that made the rounds on Wednesday included China potentially doubling their solar installation target and the Ministry of Science and Technology claiming that they have given subsidies to more than 100 solar companies.
Here are some of the big movers as of mid-day (note they are surging from very low levels):
Right To Work
Michigan became the 24th right to work state in the nation, following recent converts Wisconsin and Indiana in the Midwest. The U.S. Chamber of Commerce applauded the deal saying it makes Michigan more competitive. It was a big blow to the UAW, however, it is interesting to note that the Governor, Rick Snyder, had previously indicated he did not want to deal with the decisive issue; however, once the Republican governor and the Republican's majority in the state House and state Senate were lost during the most recent election, this was one of the first pieces of legislation since the election. Michigan is of course home to the automakers and their union the UAW. The UAW once had more than one million members in the U.S., and as recently as 2004 had 654,000 active members. Now, after years of cuts by Detroit's big auto makers and their parts makers, the UAW's national membership is down to roughly 380,000 members, according to Labor Department filings. In Michigan, about 17.5% of workers were union members in 2011, according to Labor Department figures.
Bob King, President of the UAW said "Symbolically, it's a huge setback. Maybe it will awaken a sleeping giant." That is the hope for the unions now, but the auto makers have been oddly silent on the chain of events. There is no secret to the love lost between the two sides, but General Motors (NYSE:GM) and Ford (NYSE:F) have been attempting to lessen the importance of the unions (and hiring new employees at lower rates), but still has not made a comment before the legislation was passed. It will be interesting to see which other states in the Midwest will go down the same road in a hope to get more of the "new jobs."