The Market Has Become Skeptical Of The “Healing Powers” Of Quantitative Easing

Ashley Page Picture09/10/12: Let’s take a quick “look ahead” at a few items that we will be tracking carefully. These are just a few opinions that we have, and as with life, nothing is certain about them.

  1. First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five market days.

    Beginning today, the Federal Reserve reports data on July consumer credit and Congress returns after a five-week recess. Tuesday will bring a report from The Commerce Department on the balance of trade for July. Wednesday will have a definite international focus for markets as a German court will decide whether to grant an injunction against the nation’s participation in the euro zone’s permanent bailout fund. Thursday is the important day for Fed watchers as officials conclude their two-day policy meeting. Also on Thursday, the U.S. issues the August producer-price index and reports are due on initial jobless claims. The market week ends Friday with August reports for the consumer-price index, retail sales and industrial production and The University of Michigan’s first reading of consumer sentiment for September.

    What does this mean for investors?

    This is a perfect example of just how politically driven markets are these days. The “one, two” punch of the German court ruling on Wednesday and the Fed policy meeting concluding on Thursday really reminds us just how much governments are involved these days in moving markets, certainly much more so than at any time in our recent history.

  2. Investors are strongly focused on the Fed this week.

    Will the Fed begin another round of quantitative easing, or will it not? The heart of the matter comes down to weighing costs and benefits of such a move. The Fed already has bought more than $2 trillion of Treasury and mortgage bonds to stimulate the economy. The Fed believes this drives down long-term interest rates, elevates stock and real-estate values and softens the dollar. In turn, the argument is that this lowers financing costs, increases U.S. companies’ global competitiveness and bolsters household wealth. But, are rates so low already that this will have no real meaningful impact? Recent data in a Johns Hopkins University study argues that quantitative easing benefits are only temporary. Echoing that sentiment, John Higgins, senior markets economist with Capital Economics, a London-based research firm, states, “I think the question is whether there will continue to be a positive impact when the Fed announces it.”

    What does this mean for investors?

    First, the Fed has two additional months now of “trailing data” on which to base their decision. Second, any move by the Fed is much more “politically charged” for decision makers with the election only a couple of months away. Regardless of which decision the Fed makes, the interesting point to us seems to be that the market has become much more skeptical as to the “healing powers” of quantitative easing.

  3. Financial Market Outlook

  4. German judges on Wednesday are weighing the constitutionality of the permanent European aid facility.

    The eight judge court that is the equivalent of the U.S. Supreme Court is deciding this week only whether to grant a preliminary injunction that would suspend Germany’s ratification of the European Stability Mechanism (ESM) pending a full ruling on whether the ESM is compatible with Germany’s constitution, expected in December. However, analysts say Wednesday’s verdict will send a clear signal about the court’s final decision. The German government and most legal analysts predict the country’s constitutional court won’t block the ESM. If they are wrong, though, the euro zone could find itself short of authorized funds to prop up struggling members such as Spain, forcing Europe to redesign the safety net for crisis-hit countries. All other euro-zone countries have ratified the ESM with the exception of Italy and Estonia. For obvious reasons, the German court is viewed as the biggest hurdle.

    What does this mean for investors?

    That the European situation is a problem of execution more than anything. As we have often said in this blog space, just because European leaders can “hand stack” and show a united front to world markets does not mean that “getting there” will be at all easy or quick. Whether it is labor union reform in Italy, chronic unemployment in Spain or German high court reviews of the ESM, fixing Europe will be a complicated, diverse and lengthy endeavor.

  5. In addition to Europe, we are carefully monitoring economic developments in the Far East, primarily Japan and China.

    Japanese Q2 GDP rose 0.7% quarter over quarter, half the initial estimate of +1.4% and below consensus of +1%. GDP fell a nominal 1% in annualized terms versus +5.5% in the first quarter. With the economy losing momentum, economists increasingly expect Japan to slip into contraction this quarter. Meanwhile, industrial production in China continued to slow in August while inflation showed initial signs of rising, the latest set of worrying data to come out of the world’s second-largest economy. The metrics highlight the dilemma faced by policy makers over how forcefully to respond to China’s weakest economic growth since the onset of the global financial crisis in 2007. Overly aggressive stimulus of the Chinese economy could reinflate a property bubble or increase inflation pressures. Too little stimulus could keep their industrial production too flat for any meaningful growth.

    What does this mean for investors?

    That market influences on your portfolio these days come from everywhere in a “concert” of international activity. We are truly now one global economy, and the faster that an investor understands and plans for that, the better. A Japan/China combination could be yet another “influence drag” on an already anemic U.S. recovery.

If you have any questions about the economy or markets, feel free to email me here or call me at (205) 989-3498.

Ashley Page
Senior Vice President
Wealth Consultant

Sources: Wall Street Journal, 09/9/12, SeekingAlpha.com.

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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