Today is quite light on economic news and we can still see some spillover effect from Bernanke’s announcement of a third round of QE. The Fed has been under a lot of political pressure lately as presidential elections near and unemployment remains sticky. The central bank announced on Thursday it was going to buy up to USD 40BN MBS per month until the situation improves. The goal of this operation is to substantially decrease mortgage rates, which would provide a boost for the housing market and therefore allow for economic growth. However, we can see that the spread between the 10-year treasury yields and the current coupon Fannie Mae collateral has narrowed slightly in favor of mortgage rates but the level of mortgage yield has not change. What’s more, if one looks at the expected average annual inflation rate over the upcoming 5-year period, it has risen to 2.85% from a trough last year of 2.0%. Hence all the Fed has obviously succeeded in doing during the past QEs is to fuel inflation expectations, not only domestically this time, but also globally. Chinese former Banking Regulatory Commission Chairman declared that the FOMC’s decision is “irresponsible” for the US as well as for China. The Chinese government and the PBoC have managed to only intervene in targeted areas of the economy so far and Xinhua News Agency reported that the country will achieve a higher annual growth than the 7.5% target. QE3 will probably be boosting household consumption, raising demand for Chinese goods and bolstering exports. The bad news for China and Asian countries in general is the rise in capital inflows: Further easing in the US would channel more speculative capital into China as investors expect a stronger CNY and lower inflation than the US. On the Sino-Japanese front, we are witnessing some geopolitical tensions over a bundle of small islands in the East China Sea after Japan declared last week that it had acquired several of the disputed islands from a Japanese family. Panasonic, a Japanese firm, stopped production at three of its Chinese plants as violent anti-Japanese protests damaged some parts of the factories. The event could strongly damage the trade flows between the two nations. Copper dropped overnight and AUD is now trading lower at 1.0520 from Friday’s high at 1.0625.