Questioning Quantitative Easing

Speculation over the reduction or expansion of quantitative easing largely amounts to market noise.

April 24, 2013   |    By Scott Minerd

The continuing deflationary environment gives policymakers leeway to keep monetary conditions easy.

ScottMinerd

Global CIO Commentary by Scott Minerd

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.

Commodity Prices Weigh On Inflation Expectations

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.

S&P GSCI GLOBAL COMMODITY INDEX VS. U.S. 5-YEAR INFLATION EXPECTATION*

Commodity Prices Weigh On Inflation Expectations

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.

Economic Data Releases

Housing a Bright Spot Amidst Overall Disappointing Data

Slowing Signs of Economic Activity Across Europe and China

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.



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