What the current market environment has turned into, hardly needed any further clarification with this morning’s publication of a headline that blared (kid you not): “Street To Stump For QE2.” While such drumbeating draws closer and louder, the real question of the day and the week is likely to become: will the same “Street” “vote” with its feet (by either stomping in anger or stampeding on a run) if, in fact, the Federal Reserve turns out to be…reserved?
Thus, the first trading week of November has turned out to be the most hotly contended (among pundits and market players who have many billions riding on the Fed easing bet) as well as hotly contested (among politicians who have at least $4 billion riding on their own bets for various positions) week of the current year. There is a lot more to consider as regards the aftermath of the Tuesday elections and the Wednesday Fed announcement however.
For example, the fact that within less than 36 hours after the Fed does whatever it plans to do, virtually all other major central banks are expected to be announcing something of their own. It will, in fact, be a period during which the largest ‘planetary alignment’ of central bank policy announcements since the stormy first week of October 2008 converges upon global markets. Consensus is, that the Fed – if it eases aggressively – will start the dreaded ‘race to the bottom’ as its counterparts around the world are forced to respond.
Much has been said and launched in the direction of the Fed in the hopes that it is listening. The US central bank cannot but be aware of the fact that its credibility is squarely on the line ahead of, as well as after, it executes its maneuver. The risks being undertaken stem not only from the fact that this is experimentation on the grandest of scales (and, by definition, no one knows what could go ‘boom’ even if the intent is for jobs to do so mainly) but also because of the interrelatedness of global markets. This is one heckuva “PSAT” test (Policy Steps Aptitude Test) for the Fed. “Fail this not, must you” Master Yoda would warn.
While all of this hand-wringing was going on, guess who chimed in over the weekend in opposition to a much further weakening US dollar? No, it was not Tim Geithner. He tried that a couple of weeks ago and did not get very far with it. It was…China. The country’s Ministry of Commerce warned that the hitherto steep losses in the greenback’s value have already prompted currency market interventions by Japan, Thailand, and South Korea. It also warned that US policies and the “continued increases in commodity prices” that they have engendered are hurting China’s businesses. There, they said it; the “b” word in commodities.
Then again, China does have something to ‘protect’ indeed when it argues against further dollar weakness. Especially on the heels of reports that its manufacturing activity sector gained strength and that China’s Purchasing Managers’ Index rose to 54.7 last month. Such gains may well shrink if not totally dissipate if its chief market partner imports less in the post-Fed environment.
Back to the pre-Fed environment, for the moment. US consumer spending data showed a rise of 0.2% in September even as incomes fell 0.1% on the month. The savings rate in the US fell sharply and was recorded at its lowest level in 13 months. That ought to make the Fed ‘happy’ if in fact it is searching for evidence of life among consumers.
US inflation (what inflation?) remained flat (ex food and energy). The lack of inflation will likely turn into the micro-focus for the day, even as manufacturing data is slated to hit the wires later on. Of course, the main ‘number’ to be juggled around today and tomorrow will be 500 (as in: will the Fed bond purchase plan come in at, above, or under the $500 billion mark?).
Daiwa Securities’ chief economist, Mike Moran, offered the possibility that only $200 billion will be announced as of Wednesday. One can only imagine the fallout of such a ‘meager’ shopping plan based on the outrageous headline we quoted several paragraphs above. At the other end of the scale, figures such as $2 trillion (as per Goldman) and even $5 trillion have been floated as ‘necessary.’ No analysts were located who would dare say that the Fed will buy zip, nada, nothing. It is THAT much of a one-way street out there, folks. One-way streets are fine, so long as they do not end in a cul-de-sac.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America