Is good news (better growth) good news or bad news?
The most recent string of economic releases have been pointing to an American economy that is growing, albeit slowly at a 1-2% real rate of growth. The WSJ reports that primary dealers are expecting that QE3 is on the way:
The primary dealers also see a 60% chance of the Fed adding to its System Open Market Account holdings — embarking on QE3, in other words — in the next two years. That also gibes generally with what many on Wall Street seem to expect.In addition, Zero Hedge has reported that Deutsche Bank believes that the market has discounted $800b in QE3:
Analyzing historically the reaction function of real rates to QE announcements, we find that USD19bn of new QE tend to reduce real rates by 1bp. Based on this estimate and on the model dislocation, we find that the 10Y real yield was fully pricing in Operation Twist in September and that since then the dislocation has increased to price in another full QE package, similar in size to QE2, of about USD800bn (excluding reinvestments of maturing agency and MBS holdings).Here's the Big Question: Supposing that the high frequency economics releases are right and GDP is growing at a 1-2% rate. Wouldn't that restrain or delay QE3? (As an aside, star bond manager Jeff Grundlach said during the Q&A after yesterday's presentation that he doesn't believe that we will see QE3 between now and the election.)
How will stocks react? Positively because organic growth is rising, or negatively because the Fed won't be unleashing a tsunami of liquidity that accompanies quantitative easing?
Are the markets already to price in such a scenario? Ed Yardeni wrote that while the Street consensus revenue estimates have been ticking up, earnings estimates have been falling. This sounds like an environment of good news is bad news for the markets and bad news is good news.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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