Is QE3 A Possibility?

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By Mike Conlon | July 13, 2011

That is the question that is being asked today after yesterday’s release of the most recent FOMC meeting minutes, where the possibility was raised for the first time. Bernanke’s semi-annual report to Congress later today may provide some clarity, and he may weigh in on the debate over raising the US debt ceiling and the potential effects of not getting the job done.

Across the pond, the Euro snapped back yesterday after 5 days of selling as rumors that the ECB was supporting both Spanish and Italian bonds provided some relief. However, Moody’s down-graded Ireland’s debt to junk yesterday citing potential problems accessing the private markets, essentially adding fuel to that fire.

One bullet dodged overnight was the release of Chinese GDP figures, which even though they came in at a 2-year low, was still robust at 9.5%. This has helped encourage some risk appetite this morning, as stocks are trading higher to start the morning.

In the forex market:

Aussie (AUD): The Aussie is mostly higher on risk appetite as Chinese GDP figures mean that there may be continued demand for Australian exports. However, a lower than expected consumer confidence reading may mean reduced spending, as fears over the Euro debt crisis and higher commodities prices derail demand.

Kiwi (NZD): The Kiwi is also higher for the same reason as the Aussie ahead of tonight’s GDP release which is expected to show that the economy grew at .3% last quarter. While not a world-beating figure, the bar is set pretty low even considering the earthquakes they experienced.

Loonie (CAD): The Loonie is mostly higher as oil prices are back in the $97 range despite the release of the SPR. There is no news expected for Canada for the rest of the week.

Euro (EUR): The Euro is trading mostly higher after yesterday’s rumor of the ECB providing a bid for Spanish and Italian bonds to halt their increases in yield. Yesterday’s downgrade of Ireland appears to have had little impact on the Euro zone as a whole.

Pound (GBP): The Pound is mixed to lower as jobless claims figures came in worse than expected, with 24.5K new claims vs. an expected 15K. While the unemployment rate remained steady at 7.7%, signs that government austerity may be affecting the economy are becoming more apparent. (Click chart to enlarge)

Swissie (CHF): The Swissie is slightly lower today as demand for safe haven assets is reduced with markets trading higher to start the day. Producer and Import prices came in lower than expected, most likely the result of a stronger franc.

Dollar (USD): Bernanke is set to deliver his semi-annual address to Congress today and the Q&A session may reveal further clues about monetary policy in the near future. Expect politicians to ask him to weigh in on the debt ceiling debate, and be mindful of any further discussion of the possibility of QE3.

Yen (JPY): The Yen spiked last night and strengthened to levels not seen in four months, prompting BOJ officials to try to jawbone the currency lower as a stronger Yen will affect exports. While industrial production figures were negative, they did come in better than expected. (Click chart to enlarge)

The minute released yesterday from the FOMC were very telling as even they admitted that it would be largely a fruitless endeavor, but let’s all remember that we have to consider the state of the economy at that time. What happens if the economy worsens?

Employment figures are moving in the wrong direction, Washington DC is a mess without a fiscal budget, and the markets are getting spooked about what could happen if the debt ceiling isn’t raised. And that’s just here in the US!

While Chinese growth continue to be on the north side of absurd, the Euro zone is experiencing a much different environment. With the looming debt crisis forcing action that may not be financially responsible, it is only a matter of time before the markets turn on the US if we don’t get our act together.

The only way I can fathom that we see QE3 is if the fiscal side of the ledger continues to be a mess and the reactionary Fed has to once again step in and do the job that our elected politicians are too weak-willed to do. While the “deadline” for this to occur is August 2nd, we will not default on our obligations even if they don’t strike a deal.

It is, however, unclear what type of damage it may do to the markets. So this is definitely one to watch for the rest of the summer!

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Topics: What To Look At In The Market |

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