The Global Markets Weekly – 9/14/12

Posted September 17, 2012 by rvillareal

QE3 Arrives

The FOMC has forged ahead in what the majority believes is further accommodation, printing money to buy mortgage-backed securities at a rate that would expand its balance sheet 17% over the next year.  The buying program is open-ended, going on until “the outlook for the labor market” improves “substantially.” If improvement “in coming months” is inadequate, balance sheet growth may be stepped up with “additional asset purchases,” and the Fed will “employ its other policy tools as appropriate.”

[private]The immediate objective of the program is “to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

Opinions can differ as to what portion of the very contained improvement that has occurred in the economy should be attributed to the Fed’s entire easing program, but odds are, it is less than most would have expected.  Lowered interest rates have had relatively little effect in stimulating demand, and money in the hands of the public never expanded to a degree that monetarists would consider meaningful.

In-house hawks and outside critics have pointed to the risks involved in the Fed’s ballooning balance sheet, and in the loading of the boat preponderantly with longer-term securities.  And, the FOMC majority—all very sophisticated analysts—certainly comprehends them, but judges them to be “manageable.”    Time will tell whether they are, and whether mega-accommodation was a constructive offset to structural real-economy and banking-system problems.

• U.S.:  Along with a deluge of speeches by FOMC participants, representing the full spectrum of views, the week will bring the earliest September manufacturing-sector readings and the first substantial August housing numbers.  Both the Empire State and Philadelphia Fed surveys should show factory activity moving back towards stability, while August housing starts and existing home sales will increase modestly.
• Eurozone:  The stand-out data in the coming week will be the PMI Flashes, though market reactions may be over zealous. Little change is expected in either the manufacturing or services figures. The ZEW Survey, also to be treated with caution, arrives at bit earlier, and may see something of a bounce this time around.  Eurozone flash Consumer Confidence updates this may be interesting reading, after the new weakness evident in the August numbers.
• § UK:  Minutes to the September MPC meeting will clearly point to the policy puzzles confronting the BoE, with the hope that a clearer picture will emerge by November—when the current asset purchase program will be completed.  The BoE seems open to more stimulus, should it then be needed. Among data of the week, the CPI for August may get greater scrutiny than normal given the unexpected clear pick-up seen last time, and the CBI Industrial Survey may be all the more keenly dissected this month given that other manufacturing survey numbers have been so markedly volatile of late.
• Japan:  The BOJ Policy Board meeting will consider whether to schedule balance sheet expansion even beyond that envisioned in its still-incomplete asset purchase program.  Concern about exports has grown, repercussions for domestic manufacturers are being felt, and the Fed’s QE3 move has certainly not reduced upward pressure on the yen. Policymakers are likely to step up, at least symbolically, the size of the asset-purchase program or of a lending program.
• Emerging Markets/Regions:  Central bank meetings are due in India and Turkey this week.  In India, it is quite possible that conditions have in such a way that the Reserve Bank may choose to relax monetary conditions, perhaps marginally at first, and then gradually—the chance of a small interest rate reduction has risen slightly above 50%.  In Turkey, the central bank is unlikely to change the repo rate, but the TCB may “narrow the interest rate corridor” with a lowering of the lending rate that serves as the upper bound. http://decisioneconomicsinc.com/wp-content/uploads/2012/09/gmw_0914122.pdf    [/private]