April 24, 2013 | By Scott Minerd
The continuing deflationary environment gives policymakers leeway to keep monetary conditions easy.
The majority of recent economic data has come in below expectations, which has opened the door for discussions about the possibility of more quantitative easing (QE). Only three weeks ago, the market was concerned over the possibility that the asset purchase program could be tapered. Now, however, with the arrival of weak economic results and ongoing global economic headwinds, we are seeing investors’ bias shift. The market is moving from fear over the reduction of QE to prognostications over the extension or expansion of it.
Fueling this shift in sentiment is the recent statement by the president of the Federal Reserve Bank of St. Louis, Dr. Bullard, who said that QE could be increased. This message was meant to convey that the Fed’s policy is dynamic enough to work in any market environment. It appears as though there will be speculation about the impacts on QE each time we receive a new piece of economic data or news. All of this largely amounts to noise and the more important takeaway is that QE will last through the end of this year, and possibly into next year.
The recent sell-off in global commodities has dampened U.S. inflation expectations. The breakeven rate on 5-year Treasury Inflation-Protected Securities (TIPS) has fallen by 48 basis points over the past month. The last time inflation expectations fell to this level was during the announcement of the latest stimulus program by the Federal Reserve. This decline, combined with the weaker economic data of the past few weeks, has eased pressure on the Federal Reserve to taper or end its current stimulative programs.
Source: Bloomberg, Guggenheim Investments. Data as of 4/19/2013. *Note: The 5-year inflation expectation is the difference between the nominal 5-year Treasury yield and the 5-year inflation-protected Treasury yield.
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