October 12. QE lag times

–Just a few quick broad notes as I missed most of the action last week.  First, from Reuters: A report by the Group of Thirty, an international body led by former European Central Bank chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures.
“Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on, and (bond) purchases have had their price,” the report said.
–This thought echoes that of Blackrock’s Peter Fisher, who on employment Friday one week ago said that the Fed’s ability to stimulate through monetary policy is played out.
–Yesterday, Stanley Fischer said that the Fed is likely to raise rates this year, but that is
“an expectation, not a commitment”, and could change if the global economy pushes the U.S. economy further off course (RTRS).

–In many ways, the end of QE purchases was a much larger tightening event than a potential FF target increase.  One of the outcomes of QE was to push investors into riskier, longer term assets.  Without QE these assets have to seek more realistic levels, which has been occurring, but there is obviously a long lag time.  Because there haven’t been historical episodes of QE until recently, there’s little research on how those lag times play out.  As a side note, Peter Fisher also mentioned that the Fed’s models didn’t, until recently, take into account financial market volatility measures like the VIX.  QE also had the effect of suppressing volatility.  By allowing the MARKET to tighten conditions, the Fed HAS tightened.  But I haven’t really heard any Fed official say that.
–In Japan, it’s becoming pretty clear that QE has already played out.  The first effect was to weaken the yen, which stimulated exports.  But other countries eventually follow suit.  The weaker yen causes import prices to increase, but if wages don’t keep pace (which is the case) then the effect on consumer spending is negative.
–In the US the “expectation” of a hike has strengthened the dollar, in turn slowing global trade, and pushed the inventory to sales ratio in the US ever higher.  From BI, “…earnings growth for the companies in the S&P 500 have been negative for 2 straight quarters, which rarely happens outside of recessions.”
–Though last week was a big risk relief trade, the longer term picture is that assets still need to seek more appropriate market based values.

Posted on October 12, 2015 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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