Questioning Quantitative Easing (Minerd)

by Scott Minerd, Chief Investment Officer, Guggenheim Partners LLC

The majority of recent economic data has come in below expectations, which has opened the door for discussions about the possibility of more quantitative easing (QE). Only three weeks ago, the market was concerned over the possibility that the asset purchase program could be tapered. Now, however, with the arrival of weak economic results and ongoing global economic headwinds, we are seeing investors’ bias shift. The market is moving from fear over the reduction of QE to prognostications over the extension or expansion of it.

Fueling this shift in sentiment is the recent statement by the president of the Federal Reserve Bank of St. Louis, Dr. Bullard, who said that QE could be increased. This message was meant to convey that the Fed’s policy is dynamic enough to work in any market environment. It appears as though there will be speculation about the impacts on QE each time we receive a new piece of economic data or news. All of this largely amounts to noise and the more important takeaway is that QE will last through the end of this year, and possibly into next year.

Economic Data Releases
Housing a Bright Spot Amidst Overall Disappointing Data

• The leading indicator index fell for the first time in seven months during March, with five of the 10 components down.
• Existing home sales unexpectedly dropped -0.6% to a 4.92 million annualized pace in March.
• New home sales rose 1.5% to a rate of 417,000 in March, making the first quarter the best since 2008.
• The FHFA House Price Index climbed 0.7% in February, marking the 13th consecutive month of increasing prices.
• Initial jobless claims for the week ended April 13th increased slightly from 348,000 to 352,000.
• The Chicago Fed National Activity Index fell to -0.23 in March, a larger-than-forecast decrease. The Philadelphia and Richmond Fed indices for April were also down unexpectedly.
• The Markit manufacturing PMI fell in the preliminary April reading to 52.0.

Slowing Signs of Economic Activity Across Europe and China

• The eurozone’s composite PMI was flat and manufacturing decreased in the April advance reading. Germany’s manufacturing PMI indicated accelerating contraction in April at 47.9 and services also slipped into contraction. French PMIs beat estimates, but remained in contraction.
• Eurozone consumer confidence improved in April to -22.3, the best result since July 2012.
• French business confidence declined for a second consecutive month.
• U.K. retail sales fell 0.7% in March, and the unemployment rate rose to 7.9%.
• Japan’s trade deficit narrowed in March to the lowest level since last June’s surplus.
• The HSBC China manufacturing PMI fell more than expected in April to 50.5.

Chart of the Week
Commodity Prices Weigh On Inflation Expectations
The recent sell-off in global commodities has dampened U.S. inflation expectations. The breakeven rate on 5-year Treasury Inflation-Protected Securities (TIPS) has fallen by 48 basis points over the past month. The last time inflation expectations fell to this level was during the announcement of the latest stimulus program by the Federal Reserve. This decline, combined with the weaker economic data of the past few weeks, has eased pressure on the Federal Reserve to taper or end its current stimulative programs.

S&P GSCI GLOBAL COMMODITY INDEX VS. U.S. 5-YEAR INFLATION EXPECTATION*

Source: Bloomberg, Guggenheim Investments. Data as of 4/19/2013. *Note: The 5-year inflation expectation is the difference between the nominal 5-year Treasury yield and the 5-year inflation-protected Treasury yield.

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