DCSIMG

Fed: QE3 is still on the table

Chief Analyst - Johhny Bo JakobsenFederal Reserve chairman Bernanke said Wednesday that further bond purchases by the Fed remain “very much on the table” if the economy needs further support. However, rather than suggesting that more asset purchases are under serious considerations, the chairman confirmed my impression that QE3 will only come into play in the event of serious disappointments on the growth front, especially in the labour market.

Thus it is even more clear now that it will require weak employment reports for both April and May for QE3 to be announced at the June FOMC meeting. But because I still expect economic data to continue to disappoint over the next couple of months I do continue to forecast QE3 in June.

However, I realise it is close to a 50-50 call. It is indeed possible the Fed will decide to end Operation Twist as planned on 30 June without putting QE3 in place. In that case, however, I would expect to see a further sell-off in risky assets and a stronger USD, as seen in the recent past once the Fed ends it easing initiatives (see chart below). Something which eventually could force the Fed to implement QE3 in H2 2012. (I do not agree with those who claim the Fed will be reluctant to introduce QE3 around the election, if needed).

Consistent with a small upgrade of the FOMC participants’ economic projections, including a reduction of the Q4 2012 unemployment forecast to 7.8-8.0% from 8.2-8.5% in January, participants’ forecast of the Fed funds rate took a small step to the hawkish side. Thus, 13 of the 17 participants now expect at least some increase in rates before end-2014, up from 11 in January (see charts below).

However, as Bernanke stressed at the press conference, the participants’ projections of the Fed funds rate do not set the path for rates in stone. These projections serve as input to the discussions, Bernanke said, noting that the committee had no difficulty coming to a consensus that the guidance that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014” is still appropriate. It is also worth remembering that of those five FOMC participants who publicly have said they favour a rate increase before 2014, only Richmond Fed president Lacker is a voting member of the committee this year.

Unsurprisingly, the committee also decided to continue the ongoing Maturity Extension Program – Operation Twist.

Risk-off as the Fed takes away the punch bowl

More FOMC participants call for first rate hike in 2014: 13 of the 17 members now expect at least some increase in rates before end-2014, up from 11 in January

Longer out markets are discounting less monetary tightening than even the most dovish FOMC participants expect

FOMC economic projections (central tendencies)
 
 
 
Find all of Johnny Bo Jakobsen's research on his home page

Latest research

Swedish Morning Briefing - Friday 25 April

• Kerry harshly criticises Russia • US mortgage loan demand at 14-year low

FI Eye-Opener: Spanish economy rising from the ashes

US yields continue to fall – more gains for bonds in store today. Rising Eonia signalling money market tensions increasing. S&P puts Russian investment grade status in jeopardy – Fitch raises its outlook on Italy. Draghi spells out policy options – threshold for further easing not great. Improving German confidence old news – Spanish GDP growth picks up. Denmark scraps negative policy rates. US consumer confidence and LTRO repayment data ahead.

Euro Rates Update

The latest Euro Rates Update is now available

Denmark: Surprise surprise - the hike is here

A short while ago Nationalbanken announced that with effect from tomorrow, the deposit rate reads +0.05% rather than -0.1%. In the press release, Nationalbanken highlighted that capital outflow in the FX market was part of this decision. It is unclear to what extent Nationalbanken has intervened in the FX market in the current month.

Germany: improving confidence old news – next week’s inflation numbers more important

A rise in the German Ifo index, together with yesterday’s PMI numbers and an estimate that Spanish GDP growth picked up clearly in Q1 are further signs that the Euro-zone economy is picking up momentum. However, it will be next week’s inflation numbers that are more crucial in determining ECB easing expectations and thus the near-term course for markets.

Swedish Morning Briefing - Thursday, April 24

• IMF expected to endorse 17 billion dollar loan to Ukraine • Riksbank minutes from April meeting due out at 9:30 today

FI Eye-Opener: Dovish Draghi to deliver more soft words

Bonds record some gains – yields to fall further today. Euro-zone PMIs continue to show resilience – US new home sales plunge. Spain to revise its borrowing needs down. European Commission confirms Greek primary surplus – further debt relief ahead? German Ifo and Draghi’s speech ahead. Plenty of bond auctions in store.

Euro Rates Update

The latest Euro Rates Update is now available

TRY: Regime change?

Despite a clear recovery in the Turkish lira, the situation in Turkey continues to be riddled with uncertainties and the potential for market-unfriendly surprises – especially in the political arena, where Prime Minister Erdogan may be fiddling with an overhaul of the political system.

Volatility Watch

Was that a pre-warning of QE or just loose talk? The latest ECB meeting managed to both disappoint (by delivering nothing) and excite (by laying the groundwork for something big) action seekers in the market. The truth is likely in the middle, and we expect no immediate easing from the ECB. We have seen a rebound, albeit modest, in gamma vols. Early vega options (1y-2y expiries) are moving down quite quickly Overall we still see the gamma segment as cheap, whereas we’re rich/neutral on vega.

SEK Rates: SGBi auction preview

The Swedish National Debt Office will sell 1 bn SGBi 3108 (1 Jun 2022) on the 24th April

Euro area PMIs: a good start into Q2

Higher PMIs in April, both in manufacturing and the service sector. Germany strong, France weaker.

SEK FI & FX Strategy - Market Views

A re-cap of market views...

Swedish Morning Briefing - Wednesday 23 April

• Kerry warns Russia to tone down its rhetoric • Chinese PMI looks set to rise

China: Not yet spring for the PMI

China’s flash PMI rose unsurprisingly to 48.3 in April. On the backdrop of favourable policies to small companies, the improvement is likely to continue in the coming months, but PMI is likely to stay below 50 because of excess capacity and debt overload.

FI Eye-Opener: China not rebounding like it used to

Bond markets with a rather calm day after Easter. Bonds with more potential in the near term. Intra-Euro-zone spread narrowing not run its course. Chinese PMI still depressed. Downside risks to today’s PMIs. Portuguese and US auctions ahead.

Preliminary Prepayments

Preliminary Prepayments

RUB: mixture of capital outflow, Central Bank’s policy and geopolitics

RUB has been under pressure recently as tsunami of capital outflow, caused by the threat of sanctions against Russia, washed away optimists and buyers of RUB-denominated assets. The pace of capital outflow increased in Q1 2014, reaching unimaginable $51 bn. (compared with $62.7 bn. in 2013). The volatility stays high on the Russian markets and the rouble remains focused on geopolitics.

Sweden: March Labour Force Survey better than it seems

Unemployment remained unchanged at 8.1% in March (seasonally adjusted). This was above forecasts at 8.0%. However, employment rose more than forecast and was up 0.3% m/m after an uptick of the same magnitude in February. Thus, the higher than expected unemployment reading in March is (once again) explained by unexpected strong growth in the labour supply, +0.3% m/m.

Swedish Morning Briefing - Tuesday 22 April

• Deal clinched during Geneva meeting • Ingves says deflation not likely