US Quantitative Easing
Asian stocks higher on fiscal cliff hopes || Fed seen likely to keep buying bonds in 2013 || Japan’s retail sales fall || Rio Tinto plans $7bn in savings || Stay granted against Argentina debt ruling || Knight Capital has two rival offers || Vivendi has four offers for GVT || Japan must revitalise the BoJ
Federal Reserve chairman Ben Bernanke offered a tempered view of the US economy on Wednesday, says Reuters, pouring cold water on the notion that recent upbeat signs herald a stronger recovery. Mr Bernanke told Congress that unless growth accelerated, the unacceptably high US unemployment rate would not keep dropping. The job market is far from normal,” he said. “Continued improvement … is likely to require stronger growth in final demand and production.” The swift decline in the US unemployment rate in recent months, to a three-year low of 8.3 per cent in January from 9.1 per cent in August, has surprised economists both within and outside the Fed given the economy’s relatively soft performance. The FT says Mr Bernanke’s comments suggest that the Fed has made no decisions about another round of quantitative easing – sure to be nicknamed QE3. The central bank’s policy will depend on whether or not consumer demand follows the improvement in the labour market. Mr Bernanke also addressed the recent rise in oil prices, which he said could both raise inflation for a time and curb consumption. Gold fell as much as $100/oz to below $1,700 on the comments, says Bloomberg.
In part one, the appetizer, we quickly looked at whether the US banking sector is stronger than it was in 2008, as Lewis Alexander, the new Nomura chief US economist, argues. On the face of it, he’s right — balance sheets appear stronger, but we can’t be sure. In part two, the main course, we look at what would happen if a crisis was to hit again.
A survey by Bloomberg of 21 primary dealers in the US revealed that 16 of them expect the Federal Reserve to resume purchases of mortgage-backed securities in order to provide additional stimulus to the economy. The Fed has already bought $2.3tr of the securities between 2008 and June of this year. The dealers polled expect an $545bn of buying in the next round, based on a median of the estimates of 10 firms. The National Association of Realtors reported that the median price of U.S. existing homes dropped 4.7 per cent in October compared to a year ago, and the failure of the supercommittee last week brings in spending cuts that are likely to damage the economy. Add on the knock-on effects of the unresolved debt crisis in Europe, and analysts are upping the probability that another round of quantitative easing, or “QE3″, is just over the horizon.
Asian markets responded less enthusiastically on Wednesday, after US stocks staged a dramatic rally late the previous day that was attributed to hopes of aid for eurozone banks and further US monetary easing. The ex-Japan MSCI Asia index was 0.3 per cent higher, and the Nikkei and Korea’s Kospi indices were both lower, Reuters reports. The S&P500 had closed up 2.25 per cent on Tuesday. Markets surged late on Tuesday after Olli Rehn, European commissioner for economic affairs, told the FT that co-ordinated recapitalisations of financial institutions were being considered. “Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.” Investors were also encouraged by a speech by Federal Reserve chairman Ben Bernanke to Congress, which Reuters says was seen as leaving the door open for another round of quantitative easing policies.
Three former senior Federal Reserve officials say the US central bank should consider a new round of monetary easing efforts, the WSJ reports. US equities rallied on the news, Reuters says, after Donald Kohn, Vincent Reinhart and Brian Madigan, all former directors of the Fed’s monetary affairs division from 1987 through 2008, said more bond purchases should be considered. Mr Kohn, who was Fed Board vice chairman before retiring from the bank in September 2010, said such move should only be considered after “a little while”, if inflation came down and economic growth remained poor. The FOMC next meets on August 9. In Asia, shares remained under pressure on concerns over the global economic outlook, the FT says.
Without the promise of additional easing from the Federal Reserve, investors are selling equities and sending gold to a new record high amid growing concerns around US and European sovereign debt, reports the FT. Wall Street is doing its best to shrug off a possible Moody’s downgrade of US debt, and is gleaning support from some well-received earnings from JPMorgan and a jump in ConocoPhillips shares after the energy company said it would split in two. US Treasuries are little changed despite the worsening outlook. But after opening higher, the S&P 500 ended the day 0.7 per cent lower. Weighing were a retail sales report showing flat sales in the quarter, when autos and petrol are excluded, and Fed chairman Ben Bernanke stressing in comments to lawmakers that, while he was ready to act if the economy faltered, the central bank had no support programme planned at the moment. While this was the only thing he could sensibly say under the circumstances, it was taken by those betting on QE3 as reducing the chances of imminent stimulus. Small-cap stocks in the US are being hit particularly hard, with the Russell 2000 index down 1.3 per cent.
Gold surged to a new record on Wednesday, propelled by the possibility of a third round of quantitative easing in the US, the FT says. The yellow metal, already rallying hard on the back of fiscal concerns in the eurozone, jumped to within reach of $1,600 a troy ounce after Ben Bernanke said the US central bank could take further steps to prop up the economy if needed. The Guardian notes that Bernanke still maintained that temporary factors, such as high petrol prices, had slowed the economy, and that growth should pick up when those factors ease in the second half of the year. The dollar sold off on his comments.
Up until April this year, US banks had a nice little earner. As Freakonomics explained, big banks were able to borrow cash from the Fed funds or repo market for say, 15 basis points, posting US Treasuries as collateral, and then deposit the cash received with the Federal Reserve overnight at 25bps, earning some 10bps. The FT has estimated that since late 2008, this risk-free arbitrage may have netted America’s banks as much as $200m in profits.
Core US consumer prices rose at their fastest rate for five years in May, making it almost impossible for the Federal Reserve to ponder further monetary easing, writes the FT. Excluding volatile food and energy prices, the consumer price index grew by 0.3 per cent from April to May, the most rapid increase since 2006. Compared with a year earlier prices rose by 1.5 per cent. The data suggest the US is suffering a mini bout of ‘stagflation’, the combination of stagnant growth and rising inflation, but most economists expect it to end quickly.
Hopes that US interest rates will remain at ultra-low levels for the foreseeable future are lending support to selective riskier assets, though trading is mixed as the market absorbs two trend-defining flotations and some lacklustre US data, the FT reports. The FTSE All-World equity index is up 0.4 per cent, seeing gains as the dollar softens after volatile trading. The greenback’s trade-weighted index is down 0.5 per cent at 75.10. The intermittently firmer buck – and a weak Philly Fed activity survey for May – are curtailing demand for some commodities following the previous session’s strong rally, with copper down 1.5 per cent to $4.04 a pound and oil lower by 1.7 per cent to $98.45 a barrel. Gold is off 0.3 per cent to $1,493 an ounce. Investors on Thursday appear thankful that the US Federal Reserve, while discussing its “exit strategy” showed no hurry to tighten monetary policy significantly once its $600bn quantitative easing programme ends next month. There is also little chance of the world’s third-biggest economy raising rates any time soon after Japan fell back into recession in the first quarter following the March 11 earthquake, tsunami and nuclear accident. Traders seem content for now to accept that while such monetary largesse signals continuing fundamental economic weakness in the US and Japan, it will allow globally focused corporations to remain healthy – providing growth in core Europe and developing nations can pick up the slack.
Asian stocks rose on Thursday as signs of a strengthening US job market overshadowed concern that political unrest in the Middle East and North Africa will drive energy costs higher, reports Bloomberg. The MSCI Asia Pacific Index rose 0.2% to 137.72 at 9:31am in Tokyo, with almost four stocks rising for each that fell. The gauge dropped 2.1% last week as political unrest swept the Middle East and North Africa.
The world’s largest bond fund nearly halved its exposure to US government-related debt in January, before US bond yields rose in February to their highest level in nearly a year, reports the FT. Pimco’s Total Return Fund, run by Bill Gross, a Pimco founder, reported that its holdings of US government-related securities fell from 22% in December to 12% in January. The proportion of US government-related holdings, including US Treasuries, is at the lowest level held by the $239bn fund since January 2009 when it held 15% of its assets in the category. The move fits with Gross’s strong criticism of US deficit spending and the quantitative easing measures employed by the Federal Reserve and other central banks.
Asian stocks and currencies gained on Tuesday, with the Taiwan dollar climbing past NT$29 for the first time since 1997, as the global economy showed signs of improvement and tensions eased in Egypt, reports Bloomberg. The MSCI Asia Pacific Index added 0.3% to 139.75 as of 1pm in Tokyo. S&P 500 Index futures were little changed after the benchmark had its best close since June 2008. The Taiwan dollar climbed 1% to NT$28.908 against the dollar and Indonesia’s rupiah reached its highest level in almost three months. Copper fell as much as 0.8% in London, while oil slid for a fourth day in New York.
Investors continued to bet on a US economy that is picking up steam, bidding up US stocks and selling US Treasury bonds, reports the FT’s global market overview. Global stocks were generally higher following the drop in the US unemployment rate to 9 per cent in January reported on Friday. The FTSE All-World equity index rose 0.6 per cent, to a fresh cyclical peak. The S&P 500 in New York was up 0.8 per cent at 1,320, its best level since June 2008. The resource-heavy FTSE 100 in London rose 0.9 per cent and the broad FTSE Eurofirst 300 was also up 0.9 per cent. Tresaury yields also hit their highest since April, pushed along after Richard Fisher, head of the Dallas branch of the Federal Reserve, said he “would formally dissent as a voter” if the Fed were to propose further easing. he dollar is firmer as a tug of war plays out between those still trading the buck’s inverse risk-on relationship and those noting the greenback’s improving yield attraction. The dollar index was up 0.2 per cent at 78.20 and the euro was down 0.1 per cent to $1.3571, having given up an initial advance following the German industrial data. Copper saw a new record high, then tumbled back to Friday’s close in late London trading. The London-traded contract was flat at $10,050 a tonne, having earlier hit a record of $10,160 as traders reckon supply will be outstripped by improved demand as the global economy recovers.
Asian markets rose on Friday, amid thin trading due to Chinese New Year holidays in much of the region. Markets were led by the climb of Japan’s Topix index to a nine-month high, while Australia’s dollar strengthened as signs of improvement in Japanese corporate earnings and the US economy boosted demand for higher-yielding assets, reports Bloomberg. The MSCI Asia Pacific Index increased 0.8% to 140.13, the most since Jan 19, as of 1:10pm in Tokyo. China, Hong Kong, South Korea and Singapore were closed for the Lunar New Year. S&P500 Index futures were little changed. Oil, rubber and copper advanced.
While Ben Bernanke may not have given any signs that quantitative easing would let up, he did sound alarms about the long-term US fiscal position, which sent Treasury yields near their highs, the FT reports. Meanwhile, gold was in demand but the euro was sold off as investors struggled to decipher the direction of interest rates in Europe, after Jean-Claude Trichet, European Central Bank president, said there were “short-term” inflation pressures. Benchmark 10-year Treasury bond yields ticked higher again, up 7bp to 3.55 per cent, just shy of their recent peak in December. Beyond 3.56 per cent, there are May highs, just before the European sovereign debt crisis came into focus. Gold saw an in-rush of demand after two weeks of stale movements, with gold in euro terms adding 2.8 per cent to €994 an ounce, while the dollar price rose 1.5 per cent to $1,353. Concerns over the Middle East were not much of a factor. Stock indices initially fell after violent protests in Egypt flared, though US and European shares climbed higher after Mr Bernanke and Mr Trichet spoke. The FTSE Eurofirst 300 closed flat at 1,162, up from a decline of 0.4 per cent. Brent crude oil fell 0.6 per cent to $101.68, below the $103 price point it had reached as Middle East tensions threatened to interrupt supply.
The US Federal Reserve has surpassed China as the leading holder of US Treasury securities, although it has yet to reach the halfway mark in its latest round of quantitative easing, reports the FT, citing US official data. Based on weekly data issued on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. According to Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn. FT Alphaville meanwhile looks to the next big ‘watch’ target: negative repo rates.
Beyond the spotlight glaring on China’s leader Hu Jintao as he kicks off his US visit are some intriguing movements in Beijing’s foreign reserves management. First, we had China’s pledge to buy eurozone bonds amid its recent charm offensive in Europe.
Robust US economic data on Wednesday lifted the dollar and US stocks, raising hopes over the strength of the US recovery, reports the FT. The ADP survey of US private sector employment showed private payrolls rose 297,000 in December, far ahead of expectations for a 100,000 rise, suggesting that Friday’s US employment report could be similarly strong. Analysts said the figures could signal the kind of broader economic improvement that would enable the Federal Reserve to end its quantitative easing programme. The dollar rose 1.5% to Y83.27 against the yen and 1.9% against the Swiss franc to SFr0.966. The NYT’s Economix column says while the ADP report lacks the “track record to make it deserving of too much trust”, the trend this time may be correct.
The Federal Reserve on Tuesday held interest rates and maintained its programme of new asset purchases at $600bn but slightly upgraded its view of the US economy, the FT reports. The Fed’s rate-setting open market committee said household spending was increasing “at a moderate pace” after noting in November it was increasing “gradually”. US recovery, however, was continuing at a rate “insufficient to bring down unemployment”, it said. The muted statement suggests the Fed is waiting for more clues on the impact of its quantitative easing. Indeed, says FT Alphaville, despite strong economic data before Tuesday’s FOMC, don’t expect action before January. Separately, the FT reports, US Treasury yields hit new highs after the FOMC — but, MoneySupply wonders, why?
The Federal Reserve kept interest rates on hold and its programme of new asset purchases at $600bn but made minor upgrades to its assessment of the US economy, the FT reports. The Fed’s rate-setting open market committee said that household spending is increasing “at a moderate pace”. In November, it said spending was increasing “gradually”. The FOMC said that the US recovery “is continuing, though at a rate that has been insufficient to bring down unemployment”. The “steady-as-she-goes” statement suggests that the Fed will wait for more information on the fiscal outlook for next year and the effects of its quantitative easing programme before deciding on future policy. Speaking before the Fed decision, David Semmens, US economist at Standard Chartered in New York, said that the Fed is unlikely to cut its asset purchase programme short of $600bn.
The Federal Reserve on Wednesday paved the way for the largest US banks to increase dividends and share buy-backs next year, announcing what it described as “a common, conservative” set of regulatory guidelines, reports the FT. The top 19 institutions, including Goldman Sachs and Morgan Stanley, will have to deliver a comprehensive capital plan by early next year, detailing how they will meet tougher, “Basel III” reserve criteria. Meanwhile, says the FT in a separate report, US political opposition to the Fed’s new $600bn round of quantitative easing – or “QE2″ – is fuelling calls among some Republicans for a change in the Fed’s mandate, dropping its goal of maximum employment and requiring it to focus on inflation. Reuters adds that Fed officials defended their easing measures on Tuesday, citing the need to shore up the fragile US recovery.="http:>
Well, this was bound to happen. Dagong Global Credit Rating Co. — the Chinese rating agency which hit headlines earlier this year for its AA-view on the United States — is back. With a US downgrade.
Bank loan officers say that demand for loans from small US companies fell in the past three months, casting doubt on how much the Federal Reserve can stimulate the economy, the FT reports. Twenty-nine per cent of banks said that demand for loans from companies with sales below $50m had fallen, compared with only 7.1 per cent of banks that reported a rise, according to a Federal Reserve survey of senior bank loan officers. The tepid demand for loans from small businesses reduces the chance of a strong rebound in growth in 2011 and suggests that even rock-bottom interest rates and easier borrowing conditions may not persuade them to invest. Meanwhile Reuters reports that three senior Federal Reserve officials added their voices to the debate on the new round of quantitative easing as they expressed concerns on Monday.
The Federal Reserve launched a last-ditch effort to shore up the US economic recovery with a new $600bn round of quantitative easing, but the announcement was likely to disappoint markets, with no bias towards increasing that number in the future, the FT reports. The Fed gave no signal about whether it will expand its asset purchases beyond that number after announcing it will buy the longer-term Treasury bonds by the end of the second quarter of 2011. The start of QE2 is one of the most significant decisions that the Federal Reserve has made in years. The Fed’s move is probably the last chance to hasten the decline of America’s 9.6 per cent unemployment rate as there is little chance that the new divided Congress will agree to further fiscal stimulus. It is the first time the Fed has used QE as a regular tool of monetary policy, putting its credibility and that of chairman Ben Bernanke on the line. Quantitative easing is a way for the central bank to boost the economy by driving down long-term interest rates when short-term rates are already at zero.
India and Australia raised interest rates on Tuesday amid rising inflation fears as the US Federal Reserve prepared to take aggressive monetary policy action to stimulate the stuttering US economy, reports the FT. Although both countries’ central banks cited domestic pressures on inflation as the main reason for the rises, the Reserve Bank of India also drew attention to fears that a new round of quantitative easing in the US and elsewhere could flood emerging markets with fresh capital inflows, putting further pressure on rising asset prices. The Fed is on Wednesday expected to announce a more gradual approach to quantitative easing, unlike the ‘shock and awe’ it used during the financial crisis, with initial purchases that may amount to $500bn.
Surprisingly strong Chinese and US manufacturing data provided investors around the world with something to chew over on Monday, but the fast-looming, and crucial, decision on further quantitative easing from the Federal Reserve, still held markets mostly in stasis, the FT reports. The US Institute for Supply Management’s October purchasing managers’ index beat expectations, rising to 56.9 from 54.4, surpassing expectations of a slip to 54. Readings above 50 indicate expansion. The employment component and the closely-watched new orders components of the report both bounced higher, underlining the strength of the report. The news matched unexpectedly strong gains for China’s equivalent index which had provided markets’ main talking point until the US numbers were released. China’s official purchasing managers’ index rose to 54.7 from 53.8 in September, beating expectations. The increase was backed up by HSBC’s version of the index, which moved up to 54.8 from 52.9 – one of the biggest monthly rises since the series began. New York equities markets rallied on the news, but the brief swell faded. The S&P 500 index ended higher by 0.1 per cent, at 1,184.38, off its high marks near 1,190. The broader FTSE All-World index of global stocks was up 0.3 per cent for the day.