Thursday, Oct 14, 2010
Gulf News
$500b in additional cash over six months
Dubai Investment banks are preparing to handle fresh fund flows arising from a second round of quantitative easing (QE2) by the US Federal Reserve of at least $500 billion (Dh1.8 billion) over six months.
Bank of America, Merrill Lynch and UBS are both factoring in half a billion dollars of extra liquidity being pumped into the system, as benchmark rates remain near zero and the Fed runs out of stimulus options.
“A modest policy easing is a lot better than doing nothing,” Merrill economists Michael S. Hanson and Ethan S. Harris wrote in a note to investors yesterday.
Benefits
“The benefits of QE2 are already evident as the markets price it in: the weaker dollar is a modest boost to trade, the stronger stock market is a small boost to consumption, lower bond yields may encourage a little interest sensitive spending and Fed easing is good for overall consumer and business confidence.”
The economists reckon the $500 billion worth of cattle-prod to the economy is the equivalent to a 25 of 50 basis-point drop in the Fed rate, something that the regulator cannot do as the rate is already as close to zero as it can get. The other option, doing nothing, could have a negative impact on confidence, they said. Economists at UBS Financial Services estimate that purchases of $500 billion from November until the end of 2011 would increase the level of real gross domestic product by 0.4 percentage point by end-2011 over what would have occurred without QE2.
Since a one percentage-point gain in GDP translates to almost a million new jobs created, the 0.4- point gain suggests 400,000 more jobs could be added by the end of 2011, the Wall Street Journal reported.
The September employment report confirmed that “the US jobs engine is stuck in first gear”, the Merrill economists said. “It is a sign of the times that the good news in the report was that the unemployment rate was flat at 9.6 per cent,” they said.
For the fifth month in a row, private payrolls were weak, rising just 64,000. Despite the weak underlying growth rate in the economy, the data preceding the payroll report was better than expected, prompting Merrill to increase its third-quarter GDP forecast to 2.5 per cent quarter-on-quarter from 1.8 per cent.
As much as $1.5 trillion was purchased under QE1, and Fed economists estimate this reduced long rates by a sustained 50 to 75 basis points.
Response
“The Fed is unlikely to heed the critics of QE and will push for a $500 billion plus package of purchases of mostly US Treasuries when the Open Market Committee convenes a day after the mid-term elections on November 2,” Bill O’Neill, Chief Investment Officer, EMEA, Merrill Lynch Wealth Management, said in a note sent to Gulf News.
“Last week saw very significant speeches from the presidents of the New York and Chicago Federal Reserves. The latter favours much more accommodation than we’ve put in place. US policymakers want to see a much bigger acceleration in the recovery and patience is wearing very thin,” O’Neill said.
The Fed is unlikely to heed the critics of QE and will push for a...package of purchases of mostly US Treasuries when the Open Market Committee convenes.”
Bill O’Neill
Chief Investment Officer, EMEA Merrill Lynch Wealth Management
Gulf News Report
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