Low annual US CPI triggers off expectations for QE3 again
Updated: 2012-08-25 06:49
By Ruru Saxena(HK Edition)
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The Federal Open market Committee (FOMC) minutes revealed on Wednesday that unless the US economy embarks on a sustainable recovery, America's central bank will soon unleash additional stimulus. This development should come as no surprise to our readers and with the US CPI hovering around 1.4 percent per annum, I believe the stage is now set for QE3. Remember, the Federal Reserve unleashed QE2 when the US CPI had briefly dipped below 1.5 percent per annum, so the low inflationary pressures at present almost certainly guarantee another round of 'stimulus'.
Mr Bernanke may clarify his position at the Jackson Hole meeting next week and the QE3 could be officially initiated at the next FOMC meeting. After all, the official unemployment rate in the US is still over 8 percent and economic activity is moderating. Thus, Mr Bernanke & Co will probably act soon and commence another round of asset-purchases.
This time around, instead of buying US Treasuries, the Federal Reserve may opt for purchasing mortgage backed securities as this will further assist America's housing market. In any event, QE3 will be bullish for risky assets and it may ignite multi-month rallies in stocks and commodities.
Turning to Wall Street, it is noteworthy that major US indices are trading around their recovery highs and this just proves that when it comes to investing, monetary policy trumps everything else. Today, short term interest rates in the US are near zero and they are unlikely to go up for at least another 2-3 years. Under this scenario, it is hardly surprising that Wall Street has been one of the strongest stock markets and this trend is likely to continue for several months.
Over in the real economy, America's housing market is on the mend and housing starts as well as permits have almost doubled from the crash lows. Furthermore, real-estate inventory is coming down and this is a major positive for the world's largest economy.
At this stage, nobody really knows why the homebuilding stocks in the US have rallied sharply, but it is conceivable that they are discounting the imminent recovery in housing.
Looking at commodities, it is noteworthy that the CCI Index has climbed above the 200-day moving average and this is a positive development. I had stated that additional stimulus would be required for a new uptrend in commodities. Well, in terms of stimulus, we are almost there and this is why commodities have started a new uptrend.
Now, given the weakness in the global economy, we will be very surprised to see a multi-year uptrend in this sector. Nonetheless, the ongoing rally should continue for the entire duration of QE3.
Over in the precious metals arena, the price of gold has now climbed above the 200-day moving average, confirming its new uptrend. Elsewhere, silver is still trading below the 200-day moving average. If my assessment is correct, precious metals will probably advance until next spring and silver will probably outperform gold by a wide margin.
In the currencies department, it appears as though the year long rally in the US Dollar Index is now over and a new downtrend will be confirmed when we get a close below the 200-day moving average. In the meantime, I suspect that other currencies will rally over coming months, so this is a good time to get out of the greenback.
Finally, over in the debt market, US Treasuries have weakened over the past few weeks and QE3 will probably trigger additional selling in this 'safe haven' asset. Unsurprisingly, high yield credit and peripheral European bonds are being bought by investors and this rally in risk is likely to continue until next spring.
(HK Edition 08/25/2012 page2)