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Good news is bad news for anything dramatic from the Fed tomorrow
08/25/2011 10:30 am EST
Stocks have rallied strongly this week on hopes that Fed chairman Ben Bernanke will announce a third program of quantitative easing and set off another rally in the stock market. That would echo Bernanke’s hints at a second program of quantitative easing at last year’s Jackson Hole event. Those hints eventually turned into a 28% rally in stocks that peaked on April 29.
But recent data have turned against those hopes by delivering better than expected news. The U.S. economy isn’t growing very strongly, the numbers say, but it is growing strongly enough so that dramatic action from the Fed would seem like overkill.
Yesterday, August 24, for example, durable goods orders for July climbed by 4% after falling 1.3% in June. The consensus among economists surveyed by Briefing.com was for an increase of 1.9%. Transportation orders—aircraft—made up the bulk of the gains but even without that category durable orders climbed by 0.7% in July. That was slightly better than the 0.6% gain in durable orders ex-transportation in June and much better than the consensus forecast for a 0.5% drop.
Digging a little deeper, the news isn’t so positive since the other growth sector for new orders came in primary metals. Almost every other sector was down in July suggesting that demand for finished goods is slowing. That could lead to trouble in future months with inventories building and sales slowing.
But I don’t think these numbers are bad enough for the Fed to announce something as contentious as QE3. Bernanke might say that the Fed is going to do something less dramatic—one possibility is for the Fed to stretch out the maturity of its portfolio without increasing the size of its portfolio by buying longer-dated Treasuries when Treasuries in its current portfolio mature.
But I don’t think anything less than the dramatic is going to leave traders dancing in the streets.
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