SCOREBOARD: Wherefore QE?

Germany's court decision soothed European fears but market focus was on QE3, with expectations soaring despite recent US growth.

It was a bit of a nothing night for markets as they wait for the Fed tonight, although global equities did manage to push a little higher – in general – and the news flow was positive. You may have heard, for instance, that Germany’s constitutional court was deliberating on the European bailout funds. It made its decision last night and all is well.

The decision wasn’t as contentious as I think the press and financial markets have made out though, although markets certainly reacted to it. Soon after the decision both the euro and Australian dollar shot higher – the euro peaking at 1.2937 and the Australian dollar just over 1.05. Both currencies eased off in subsequent trading and the Australian dollar settled 20 pips lower (compared to 1630) at 1.0467 while the euro was 25 pips or so higher, from 1630 AEST, at 1.2898.

The thing is, constitutional challenges to all things European are made regularly in Germany, and usually by the same people. As far as I’m aware they’ve never won anything. In any case it was ‘good’ news and that would have helped last night’s modest equity bid as, by the by, would the 0.6 per cent lift in eurozone industrial production in July (-2.3 per cent year-on-year).This again adds to my view that Europe’s downturn will be modest.

At the close then, stocks were up 0.5 per cent on the Dax, 0.2 per cent on the CaC while the FTSE was off 0.2 per cent – pressured by falls in the metals and energy space (with crude down 0.3 per cent, copper off 0.2 per cent and gold down $1.5 to $1733).

Over in the US, the opening bid was tentative and short-lived, although realistically, moves in either direction didn’t have any momentum. At the high the S&P was up 0.4 per cent and it was only down 0.04 per cent at the low – managing to close 0.2 per cent higher (1436). The Dow was then up 0.07 per cent (13333), the Nasdaq was 0.3 per cent higher (3114) while our own SPI was 0.1 per cent lower (4360). In terms of the US news and dataflow it was fairly light and minor. So we saw wholesale sales for July (down 0.1 per cent) and inventories up 0.7 per cent, while mortgage applications shot up 11 per cent in the week to September 7.

The only other thing worth noting for the price action is that US Treasuries sold off again, with the 10-year yield up 4bps to 1.76 per cent while the 5-year was about 3bps higher (0.69 per cent). Odd if the Fed is going to print tonight, unless of course the initial part of QE forever will be targeted at MBS. The 2-year sits at 0.25 per cent and Aussie futures were off 4-5 to 97.375 and 96.870 on the 3s and 10s.

Looking at the day ahead, there is no Australian data worth noting and all the excitement is going to be tonight with the FOMC meeting. Regular readers will know my view – well, guess. And let’s be frank: it is a guess because there ain’t nothing wrong with the US economy – its growing at trend and QE is an extreme policy that should be used under extreme circumstances – as it was originally sold to the market. Remember? Deflation and depression. They were the original justifications for using QE. Deflation never happened and we’re not in a depression – so what gives? Wherefore QE?

To monetise debt and deflate the dollar. It’s that simple. But there aren’t any metrics you can really look at to determine the exact timing. That more is coming is the only certainty. Timing is arbitrary though and a guess. And my guess is that the FOMC will wait to crank up the printing presses until the end-of-year fiscal cliff theatrics. It could be nasty if they don’t deliver tonight though; expectations are high. Maybe they’ll just extend the "extended period” language – to 2015 or there about.

Other than the Fed meeting we also get initial jobless claims and also producer prices.

That’s about the lot, have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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@AdamCarrEcon on Twitter.

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