Feds Signal Potential Quantitative Easing (QE3), Or Did They?


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(US) Fed’s Williams (voter, dovish): Fed is falling short on both its mandates, expects little progress on either mandate in 2012, it is essential for the Fed to continue providing support. Fed is ready to do what is necessary to attain maximum employment and price stability. Extending Operation Twist will only have a modest impact. More bond purchases, including MBS, would be the most effective tool if more Fed easing is needed.

(US) Fed’s Rosengren sees a possibility for QE3 depending on upcoming data, as the June jobs data was disappointing.

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(US) Fed’s Evans (FOMC alternate, dove): Economic conditions warrant extremely strong accommodation. Sees US Unemployment staying well above sustainable levels for some time and should not raise interest rates until Unemployment Rate moves below 7% or inflation above 3%. Stressed that the US needed a high degree of monetary accommodation and that damage intensified the longer Unemployment remained high. The Euro crisis and US fiscal cliff posed significant downside risk to US and global economies.

(US) Friday July 6, 2012 – 5:42pm EST: Late session strength widely attributed to US financial press (The Wallstreet Journal) report suggesting that the disappointing non farm payrolls increases the odds of QE3 from the Fed. Says the disappointing jobs data does not necessarily ensure more easing. Reiterates that some Fed officials would consider the option of purchasing mortgage bonds, as some research suggests it is more effective at lowering a wider range of interest rates. Points to changing inflation outlook as a result of declining commodity prices potentially supporting the dovish camp on the FOMC.

As far as analysts are concerned, here are some of their analysis, coutesy of WSJ.

BMO CAPITAL MARKETS: The fact that American businesses can’t create enough jobs to lower the unemployment rate suggests the Fed could start QE3 in the next few months, says economist Sal Guatieri. He highlights the quarterly average payrolls gain of 75,000, which was the weakest in nearly two years.

DEUTSCHE BANK: Strategist Alan Ruskin predicts the jobs data is insufficient to boost QE3 prospects because employment numbers were still close to expectations. “Growth looks to be continuing to track a little stronger than is needed to push the Fed further toward QE3.” A key indicator that was better-than-expected was the 0.4% month-over-month rise in the index of aggregate weekly hours worked, which is “one clear hint that there has been no further deceleration in activity last month.”

CITI: Don’t expect the Fed to make a big policy move ahead of the U.S. presidential election in November, says strategist Steven Englander. Although 80,000 added jobs is a “bad number,” it doesn’t constitute a “smoking gun,” Englander notes. “If this were June 2013, there would be much more anticipation of more quantitative easing.”

RBC: Economist Nathan Janzen expects the current jobs environment to increase the likelihood of QE3 since the June report marks “a third consecutive month of disappointing growth.” The average monthly employment gain in the second quarter was 75,000, well below the 211,000 average monthly gain from November through March.

BARCLAYS: In Barclays’ view, the jobs report is not weak enough to spur Fed action at the next FOMC meeting in August. Barclays notes the Fed is more likely to take action at the September meeting.

WESTERN UNION: Analysts say the employment numbers “splashed cold water” on positive private sector and jobless claim data earlier in the week, which will increase pressure on the Fed to consider QE3.

ING: While the nonfarm payrolls number is disappointing, it is not “cataclysmic” enough to get the Fed to embark on QE3, says economist Rob Carnell. He notes that average hourly earnings rose 0.3% month-over-month in June, the fastest pace since February.

CAPITAL ECONOMICS: Economists say QE3 will depend on second-quarter GDP and July’s ISM data because the jobs report was not bad enough to make QE3 “a done deal.” Both GDP and ISM numbers will be released just ahead of the Fed’s next policy meeting.

How to interpret these headlines?

Market recovered sharply towards the end of U.S. session on Friday as if QE3 was announced; but in reality, the Feds didn’t make any new announcement nor was there any breaking news.  Traders attributed the optimism to the WSJ article, pointing to the fact that it could be a direct “hint” from the Feds (*wink *wink) as WSJ is often used by the Feds for “intentional leaks”.  Of course, there are no confirmations over this, and market is likely to focus on the upcoming testimonies by Bernanke next week for further confirmations… But assuming the Feds is going with QE3, we’ll probably not see anything until after mid of August, as the next Nonfarm Payroll (NFP) will be crucial.

All in all I would probably hold off from SELLING USD on potential QE3 concerns… Market is still very risk adverse and unless we see an official announcements for a substantial sized QE program ($500B or more), it will probably do little to change risk sentiments and reverse USD’s course.


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About Henry Liu

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  1. peter cham says:

    Thank you Henry for the news, may God bless you.

  2. Missang Oyama says:

    Hi Henry,

    You are doing a great job.Good research and excellent market analysis.
    Many thanks and more grace.

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