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Is the Fed’s QE still working?

  • 01 October, 2021
  • 1:34 pm EEST

While the Fed reaffirms its commitment to full employment, some economists wonder how effective its bond purchase programme and low yields are in boosting the real economy right now.

“At the beginning of the pandemic crisis, quantitative easing (QE) had a substantial impact,” says Thomas Liebi, head of U.S. and UK markets investment strategy at Zurich Insurance.

“It provided a strong signal that the Fed would keep yields low and would do everything it could to avoid the adverse economic impact of the pandemic.”

Its impact “on the real economy is only marginal at this stage. Low yields are not the major reason to invest; credit standards are very loose, but the demand for new loans is modest,” he argues.

“The QE has probably a wealth effect linked to financial asset inflation,” he adds. “Pumping up equity markets has an impact on consumers’ behaviour as higher wealth through stock market gains will help to support consumer spending.”

Some analysts said that monetary stimulus is less effective as the economy is currently suffering from a supply-side shock.

The most urgent issue facing the Federal Reserve right now is resolving “tension” between high inflation and still-elevated unemployment right now, Fed Chair Jerome Powell said on Wednesday.

STOCKS DOWN, BUT ABOVE DAY’S LOW 

A cocktail of increasing concerns about supply chain bottlenecks and rising inflation is dampening sentiment, although U.S. political drama is being tuned down.

The Stoxx 600 index .STOXX seems unwilling to go further after being down around 1.5% in early trade. Now it is down 0.7%, with utility stocks .SX6P up 0.7%.

Autos and banks are among the losers of the session, both down 1.5% .SXAP .SX7P . Travel and leisure stocks .SXTP fall 1.1% after being the worst performer in early trade.

The U.S. House of Representatives voted to approve a Senate-passed measure that avoids a partial government shutdown.

Deutsche Bank analysts flag that European natural gas prices continued their rise yesterday, with futures up another +12.89% to bring their gains over September as a whole to +94.23%.

Meanwhile, China concerns about power shortages and their impact on the supply chain boost stagflation fears.

Shares in EDF are outperforming, up 3.6%, after electricity tariffs in France were untouched.

 

FINAL QUARTER BLUES

World stocks are set for their third biggest weekly drop this year as supply chain disruptions sweeping across the global economy raise the ugly spectre of stagflation becoming a major factor for investors in the final quarter of 2021.

Consider these two opposing pieces of data in the last 24 hours: A frantic summer of merger activity produced deals worth $1.52 trillion in the September quarter, more than any other quarter on record, according to Refinitiv data while fresh evidence of China’s waning economic momentum was again evident with the official PMI data showing factory activity unexpectedly shrinking in September. and

Even as investors struggle to grasp the implications of record corporate profit growth and slowing economies, major central banks remain optimistic about the global economy’s prospects. As Robert Almeida at MFS Investment Management says the biggest uncertainty facing markets is not the widely expected decline of corporate profitability but the magnitude of the deceleration. Add to that the swirling concerns about the U.S. debt ceiling, the passage of President Joe Biden’s trillion dollar spending packages and the ongoing energy crisis in China and Europe – and the path to the end of the year is strewn with hurdles.

So European stock futures are poised to suffer sharp falls on the first day of the last quarter, with U.S. futures not far behind. U.S. stocks are nursing losses after posting their biggest monthly drop since the pandemic-fuelled selloff in March 2020 and the greenback is set for its biggest weekly rise in more than three months. With inflation adjusted interest rates in the developed world pushing deeper into negative territory, the dollar’s rise is particularly concerning for emerging markets. Slowing Chinese growth reverberated across the region with factory activity in September shrinking in Malaysia and Vietnam and growing at its slowest rate in seven months in Japan.

Key developments that should provide more direction to markets on Friday:

A U.S. judge said Germany’s Allianz must face investor claims it wrongly “abandoned” the investment strategies it promised to use on hedge funds that suffered massive losses.

British beverage company Diageo said it will invest $500 million to increase its tequila production capacity in Mexico.

Manufacturing PMI: Spain, Germany, France, Eurozone

Debt auctions: UK 1-month to 6-month bill sales

ECB’s Schnabel speaks at New York Fed event

EUROPE IN A DARK MOOD

European stocks are set to open lower, with markets in a dark mood amid worries about persistent inflation while economic growth is peaking.

Sentiment is fragile in Europe after yesterday’s U.S. weekly jobless claims, which triggered more global recovery slowdown fears. Meanwhile, the wrangling on Capitol Hill over funding the government in the face of the threat of potential shutdowns sent Wall Street sharply lower.

Chinese markets are closed for the Golden Week holiday, but concerns about the economic impact of power shortages on global supply chains continue to dampen risk sentiment.

(Stefano Rebaudo)

Reliable Trading since 2012