Вы находитесь на странице: 1из 4

Economics

US Fed: between a stock and a bond place


DBS Group Research 10 August 2010

• The debate between equity markets and fixed income markets over the
state of / outlook for the economy continues
• The latest jobs reports has done nothing to settle the issue. 10Y UST
yields dropped 10bps to 2.82% following the release. Equity markets
are up another 0.65% to 1% from pre-release levels
• Where does this leave the Fed when it meets Wednesday?
• On the side of equity markets, mainly. Most officials still seem to
believe the economy is gradually improving
• The Fed seems unlikely to announce a reinvestment policy for
maturing MBS securities. Such would neutralize the (ever so slight)
tightening that is now occurring naturally

10Y UST yields are The FOMC meets Wednesday amidst an ongoing debate between equity and fixed
down by 55bps over income markets over the state of / outlook for the economy. And in sharp contrast
the past 2 months. to media reports, last week’s July payrolls report did little to settle the dispute.
Equity markets are Private sector nonfarm payrolls rose by a less-than-expected 71k and the June
up by 10% over the figures were revised downward (to 31k from 83k initially). Bond markets said
past month. The “told you so” and 10Y Treasury yields dropped by 10bps to 2.82%. Yields are
debate over the now down by 55bps over the past two months.
economic outlook
continues Equity markets said “Not so fast, payrolls improved by 40k in July (to 71k from
31k), not much less than the 50k / month improvement seen on average since
Feb09. That pace is three times faster than in the last two recessions (charts
below) and significantly faster than any post-war recovery.” Equity markets are

US – priv sector job creation, current and 2000-01 US – priv sector job creation, current and 1990-91
recession
chg in priv sector nonfarm payrolls, x1000, sa, c3mma chg in priv sector nonfarm payrolls, x1000, sa, c3mma
300 300
200 200
Jul10
100 100
0 0
-100 -100 1990-91 recession:
2000-01 17k per month
-200 Oct01 -200
recession:
-300 15k per month -300 Mar91

-400 -400
-500 current path: -500 current path:
50k per month -600 50k per month
-600
improvement improvement
-700 -700
-800 -800
Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94
May-08 Feb-09 Nov-09 Aug-10 May-11 Feb-12 May-08 Feb-09 Nov-09 Aug-10 May-11 Feb-12

David Carbon • (65) 6878 9548 • davidcarbon@dbs.com


US Fed: between a stock and a bond place 10 August 2010

up another 0.65% (SPX and Dow) and 1% (Nasdaq) from pre-release levels and
are up by more than 10% over the past month.
Where does this leave the Fed when it meets on Wednesday? So far, officials
The unemployment have largely downplayed the purported slowdown in the data (essentially taking
rate is a sky-high the equity market view), saying only that the outlook is “unusually uncertain”
9.5%. But the (Bernanke) and that the Fed is prepared to loosen policy further if it becomes
improvement in necessary. The latter goes without saying. But most continue to express the
labor markets has (seemingly sincere) belief that the economy continues to gradually improve.
been 3 times faster
Even the Q2 GDP report, which many regard as prima facie evidence of slowing,
than in the previous
showed nothing of the sort when it comes to demand. And if you’re worried
two recessions
about a slowdown, it’s demand you want to be watching, not supply. While GDP
(supply) growth slowed to 2.4% (QoQ, saar), growth in US demand (the sum of
consumption, investment and government spending) accelerated to a 5.3% rate.
That’s a boatload more demand than anyone dared wish for prior to the release.

US – real domestic demand growth


% QoQ, saar, domestic purchases, 05P
5.5 5.3

5.0
acceleration
4.5
4.2

4.0
GDP growth slowed
to 2.4% in Q2. But 3.5
US demand growth 3.2

accelerated to a 5.3% 3.0 2.8


rate. That’s
boatloads more 2.5
demand than anyone
dared dream for 2.0
prior to the release 3Q09 4Q09 1Q10 2Q10

So the economy does indeed seem to be gradually improving as Fed officials and
equity markets would have it. And though the Fed seems likely to hedge its
rhetoric a bit with another nod to uncertainty about the outlook, it seems unlikely
that it will make any changes in policy this Wednesday, or indeed until the data
point more convincingly one way or the other.

The Fed’s balance Automatic tightening in place


sheet is starting to What else could the Fed do? The first thing would be to reinvest proceeds from
contract as MBS the MBS securities it holds that are coming to maturity. Recall in its efforts to
securities mature. support the economy, the Fed expanded its balance sheet dramatically in mid-
The Fed’s defacto 2008 and, over the course of 2009, most of that expansion morphed into holdings
policy is one of very of MBS (housing) securities (see chart at top of next page). The Fed now holds
slight tightening $1.12trn of MBS and as they mature, the Fed’s balance shrinks and liquidity tightens
(holdings have fallen by $11bn (1%) over the past 6 weeks). By reinvesting these
proceeds, then, the Fed would keep policy neutral in the strict / precise sense of
the word, compared to the very slight tightening that is occurring naturally.
Might the Fed announce such a policy on Wednesday? It’s a close call but we
think not. From a “fundamental” perspective, the shift would have almost no
“mechanical” impact on rates or economic activity. From a sentiment perspective,
it’s by no means clear whether announcing a “loosening” of policy (however
slight) would reassure (fixed income) investors or scare (equity market) investors
who are already quite content to be pushing the market higher anyway. Between
a stock and hard place, the Fed sits. And sits pat, we think.

2
US Fed: between a stock and a bond place 10 August 2010

US Fed – balance sheet (asset side)


USD bn, nsa, wk avg
Fed total assets / liabilities
2,500

Other assets
2,000

1,500
MBS + agency

1,000

500
US Treasuries

0
18 Feb 09

20 May 09

23 Sep 09

17 Feb 10

12 May 10
28 Jan 09

11 Mar 09

25 Nov 09

16 Dec 09

27 Jan 10

10 Mar 10

31 Mar 10
7 Jan 09

12 Aug 09

14 Oct 09

4 Nov 09

6 Jan 10

21 Apr 10

23 Jun 10

14 Jul 10
8 Aug 07

2 Apr 08

1 Oct 08

1 Apr 09

1 Jul 09

2 Jun 10

4 Aug 10
Other options
What else could the Fed do further down the road if it decides that further easing
becomes necessary? Conceptually, there is only one thing: continue with so-
called quantitative easing (QE). That is, buy more and more bonds of longer and
Besides reinvesting longer maturities.
MBS proceeds, what
Many still ask what QE “really is” compared to “normal” policy and we still think
else could the Fed
the best way to regard QE is simply as a continuation of normal policy but further
do? The same thing
out the curve. How’s that? All Fed policy is the buying / selling of assets with the
it always does: buy
aim of lowering / raising interest rates. Typically, the Fed controls interest rates
more and more
at the very short end (indeed its target rate, Fed funds, is an overnight rate) by
bonds of longer and
buying and selling T-bills and conducting repo / reverse repo operations. But if
longer maturities
short-term rates are already at or near zero, as they are today, and more stimulus
is desired, the Fed needs to buy longer-term securities, perhaps 1-year bills or 2-
year bonds and so on. At the extreme, one could imagine the Fed buying 30-year
Treasuries (or even ‘perpetual’ Treasuries that never came due). QE is nothing but
this “moving out the curve” and one could usefully call it QE2, QE3 etc., the
further out the Fed went.
In this light, the Fed would be re-engaging in QE if it decided to reinvest the
proceeds from maturing MBS securities, as discussed above. It wouldn’t really be
‘new’ QE, as the aim would simply be to maintain a constant balance sheet size.
But QE it would be and some have already labelled this possibility “QE2”.
QE is nothing but When it comes to Fed options, that’s about it – lower short-term rates until they
‘normal’ policy can go no lower, then move out the curve. Technically, there is still a little more
extended further out room for the Fed to manipulate rates at the short end. Fed funds are still running
the curve at zero to 0.025% and the interest rate the Fed pays on reserves that banks keep
at the Fed is 0.25%. The Fed could lower the latter rate to zero, encouraging
banks to lend those reserves into the economy. But that would be a marginal
move in the true sense of the word. For all intents and purposes, short-term rates
are at zero and, were it needed, the next step would be to buy more assets of
longer maturities.
Still, that’s another option for another day and, in our view, another recession.
Fed policy is currently switched to “automatic tightening”, however so slight,
and we think this will continue.

Sources
Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

3
US Fed: between a stock and a bond place 10 August 2010

Recent research
China and US: Demand trumps supply 6 Aug 10 SG: Call a rose a rose 14 Apr 10

CN: Implications of rising wages 4 Aug 10 CN: Two growth myths with one stone 14 Apr 10
(Part II)
TH: Higher rates despite politics 9 Apr 10
ID: Upgrade expectations 29 Jul 10
SG: A strong start to 2010 8 Apr 10
Asia: Votes of confidence 9 Jul 10
Asia: Interest Rate Outlook & Strategy 8 Apr 10
FX: The ascension of the CNY 9 Jul 10
US: A top-down look at profits and payrolls 25 Mar 10
CN: Rising wage concern 7 Jul 10
CN: Currency appreciation not a case 23 Mar 10
SG: A year of two halves 30 Jun 10 of now or never

Taiwan-China: A quick look at the ECFA 29 Jun 10 IN: RBI bites the bullet 22 Mar 10

TW & KR: Rates up 28 Jun 10 TW: A closer look at housing 18 Mar 10

IN: Interest Rate Outlook & Strategy 17 Jun 10 Asia: Are central banks behind the curve? 18 Mar 10

MY: Addressing the supply side challenges 17 Jun 10 MY: Interest Rate Outlook & Strategy 22 Mar 10

TH: Upgraded, against all odds 25 May 10 SG: The economics of the Foreign Worker 17 Mar 10
Levy hike
Asia: Negara vanguarda 20 May 10
KR: Current account outlook 1 Mar 10
TH: Instability and growth 19 May 10
India budget: A mixed bag 1 Mar 10
ID & KR: External positions 14 May 10
ID: Notes from Jakarta 25 Feb 10
Asia: Who’s vulnerable to EU trouble? 13 May 10
IN budget: Room for spending 24 Feb 10
SG: Can Sing rates go to zero? 7 May 10
US Fed: Wake up call 19 Feb 10
EZ: It was never meant to be easy 30 Apr 10
SG: A strategic budget 17 Feb 10
MY: Surprise awaits 30 Apr 10
TW: Managing capital inflows 18 Jan 10
IN policy: Inter-meeting hikes the new norm? 21 Apr 10
ID: Interest Rate Outlook & Strategy 12 Jan 10
ID: Interest Rate Outlook & Strategy 20 Apr 10
IN: RBI’s stance on capital controls 30 Nov 09
IN: Risk of more / earlier hikes 19 Apr 10
CN: What policy options does it really have? 23 Nov 09
KR: Interest Rate Outlook & Strategy 16 Apr 10
TW: When will policy turn? 16 Nov 09
SG: More strength to SGD 15 Apr 10

Disclaimer:
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be
reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or
correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein
does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The
information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement
by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals
connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or
damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or
otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The
information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other
financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or
employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or
seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not
intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to
law or regulation.
Licence No.: MICA (P) 073/11/2009

Вам также может понравиться