Bank of America Merrill Lynch has joined the passengers on the good ship QE2 and expects to set sail some time early in New Year.
From strategist David Bianco on Wednesday:
Owing to notable weakening in the US economic data BofAML further reduced its US GDP outlook to a growth recession and cut its 2011 GDP growth forecast from 2.3% to just 1.8%. And with risks to downside growing, BofAML economists now expect the Fed to re-introduce quantitative easing (QE2) in 1Q2011 that drives 10yr Treasury rates to a low of 1.75% by 1Q2011. We are reviewing our 2011 EPS outlook but make immediate changes to our sector allocation owing to the lower 10yr Treasury rate forecast and QE2.
Full steam ahead, Captain.
And the return of QE won’t be good for the banks, says Bianco:
We downgrade Financials to equal weight from overweight on increased interest rate volatility from launch of QE2. While the decline in long-term interest rates to exceptionally low levels (10yr Treasury at 1.75% would be lowest in over 50 yrs) alleviates the risk of a material decline in real estate prices and a deflationary second wave banking crisis, the launch of QE2 raises the risk of elevated longterm inflation expectations, which could eventually move rates sharply higher. Higher rates would make asset- liability management more difficult and risky for banks. We expect bank EPS to rise in 2011 from 2010 on lower loan loss provisioning (LLP), but an upsurge in EPS will be challenged by a probable slower decline in LLP owing to weakness in the labor market and lower pre-credit cost net interest margins from a less steep yield curve than previously expected
Related links:
Should Ben really print and be damned? – FT Alphaville
Uncooperative QE – FT Alphaville