This week’s note will begin by reiterating our bullish theme on the Natural Gas market. We hav...
Don’t Expect QE3 on Friday
08/25/2011 10:03 am EST
The odds are climbing against any Federal Reserve announcement from Friday’s Jackson Hole conference big enough to make global stock markets happy.
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 US 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, 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 its size, 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.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.
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