Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Sunday, 2 September 2012

What does September bode? Part - I


The summer is officially over and if the pundits are right then the season of doom and gloom should have started from Saturday, 1st of September.

On cue the Chinese manufacturing PMI came in below expectations and at a 9-month low signalling contraction in the world’s second largest economy. But markets have consistently shrugged off all fearful prognostications and data to rally over the silly summer season. Is September going to be any different?

To answer the question, we have to follow what a famous detective once said, ‘Examine the facts Watson’. The rally over the silly summer (since the beginning of June) has been based on three shots of hope.

  1. Ben will save us.
  2. Draghi will save us.
  3. China will save us.
Let's take each hope in turn.


1. Ben will save us

Facts:
  1. Bernanke’s statement “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions.” is nothing new. Ever since the crisis the Fed has stated that it will be accommodative to promote recovery.
  2. US data has been better than expected since the last FOMC meeting. In addition, since the publication of the FOMC minutes which triggered the latest market rally, data show an improvement with many releases beating expectations (Table below).

Release
Last
Estimate
Actual
Comments
22/8
Existing Home Sales
4.37m
4.55m
4.47m
Improving, below expectations
23/8
Initial Claims
368k
365k
372k
Worsening
23/8
Continuing Claims
3,313k
3,298k
3,317k
Worsening
23/8
New Home Sales
359k
368k
372k
Improving
24/8
Durable Goods Orders
1.6%
2.5%
4.2%
Improving
24/8
Durable Goods ex-Transport
-2.2%
0.6%
-0.4%
Improving, below expectations
28/8
Case-Shiller 20-City Index
-0.7%
-0.3%
0.5%
Improving
29/8
GDP
1.5%
1.6%
1.7%
Improving
30/8
Initial Claims
374k
370k
374k
Worsening
30/8
Continuing Claims
3,321k
3,300k
3,316k
Improving, below expectations
30/8
Personal Spending
0.0%
0.5%
0.4%
Improving, below expectations
31/8
Chicago PMI
53.7
53.8
53.0
Worsening
31/8
UMich Consumer Confidence
73.6
73.6
74.3
Improving
31/8
Factory Orders
-0.5%
2.0%
2.8%
Improving
Source: Yahoo Finance
  1. Labour market remains moribund (as seen by the claims data above).
  2. No action on the horizon to avert the looming fiscal cliff.
  3. Republican ire at the Fed’s easy money policy is increasing with Romney categorically rejecting his re-appointment if he wins the Presidency. An opinion piece in the FT by Senator Corker, a member of the Senate Banking Committee, assailed Bernanke and asked him to show “some humility”.
Analysis:

The hope that Ben will save us is based more on faith than on facts. As I’ve argued earlier, in the face of a liquidity trap the Fed is powerless. QE by itself is going to do nothing for employment. But that is not going to stop Bernanke and his merry men from trying to beat von Havenstein’s record for easy money policy. The question for those transfixed at the short-term is whether Bernanke announces QE3 at such a politically sensitive juncture given the political opposition and the improvement in economic data. The answer is that he is likely to disappoint the faithful.

In spite of the likely near term disappointment, the good news is that the US economy seems to be on the mend (maybe not fast enough for impatient policymakers but then years of excess cannot be corrected in months). The bad news is that fiscal contraction due to the looming fiscal cliff needs to be averted for the economy to at least stay on the current anaemic growth trajectory. With a Vice Presidential candidate spouting Randian gibberish and polarised electorate and Congress, the chances of a compromise to avert the cliff appear slim.

Verdict:

Market expectations regarding QE3 are likely to be dashed unless the Europeans force Ben’s hand. Assets which have rallied on QE3 hopes look vulnerable. If you've bought the rumour, be ready to sell the fact. 

Continue to Part - II

No comments:

Post a Comment