Attention, attention - all hands on deck. The good ship QE3 is boarding and preparing to sail! The only question is when will she depart? This past week's economic reports added another layer of certainty that the Federal Reserve will take some action when the Open Market Committee meets on Sept. 13. Why the new layer of certainty? It is mostly due to the continuing string of weak economic numbers, specifically the Friday jobs report which showed only 96,000 new non-farm jobs added last month. So, the market is expecting QE3 to be unleashed setting us up for potential disappointment if it is not announced. What is very likely is that the Fed at least announces an extension of the short-term rate policy into 2015. To me, the announcement of another round of easing (ie, QE3) is not a slam dunk given the election around the corner. We'll see around 2 p.m. on Thursday.
Overseas, the ECB basically did about exactly what the market was expecting, or maybe even a little more. ECB President "Super Mario" Draghi announced that policy makers agreed to an unlimited bond-buying program of bonds issued by euro-zone countries. It won't claim senior status putting it level with other investors. Also, in a nod to Germany, they agreed to "sterilize" the purchases. No, that doesn't mean putting the white gloves on to buy potentially hazardous Spanish, Greek and Italian bonds. It means that they will do so without increasing the balance sheet of the ECB by selling other assets to buy the bonds. Conversely, the US Fed has significantly expanded its Balance Sheet during its Quant Easing initiatives. In theory, this should put a temporary band-aid on Euro ills and buy time for a better solution. It could also help the European markets rally even further if a more formal plan is put in action in coming weeks. There are still some hurdles to overcome.
In summary, the markets now appear to be in a position where they are being held together by the Bernanke and Draghi Puts. That is, each time things appear to worsen, either one or both Central Bank heads hold the option to unleash quantitative easing onto the markets, thereby coming to the rescue. As long as they hold that Put, the markets don't want to sell-off for fear of missing the rebound when Ben or Mario come to the rescue. A precarious position it is. But it has buttressed the markets nonetheless.
FORZA SURVEY UPDATE
For fun, I thought I'd take a look back at the Forza Financial Data Survey we did at the beginning of the year to see how our consensus forecast is looking and see if anybody is close individually to getting the bottle of wine and year-end. Here are the current levels and the closer of the average or median forecasts.
S&P 500 1,438 1,350
DJIA 13,306 13,380
Euro 600 272 251.6
Oil $96.42 $100.8
Gold/oz $1,737.5 $1,500
Euro/$ 1.282 1.27
10-yr UST 1.66% 2.10
GDP% <2% 2.68%
Individually, there are a few people that are close but with 3 months to go, a lot could happen. In general, it looks like the stock markets are a bit better, Gold is much higher, and the UST Yield is significantly lower due to the continued Fed easing. The economy is worse than we forecasted. On the political front, as a reminder, our forecast was very tight with a slight nod to Obama.
Finally, let's not forget that tomorrow is 9/11, the 11th anniversary of the attacks on America. Please set aside some time to remember those that lost their lives and reflect on all that has transpired since then.
Global markets rallied on the ECB move with the S&P 500 closing the week at 1437.9. up 2.23%, its highest level since 2008. The Dow climbed 1.65% to 13306.6, its highest since December 2007 and the NASDAQ closed at 3136, up 2.26%, a level not seen since 2000. European stocks jumped with the Euro Stoxx 600 climbing 2.28% to 272. Asia/Pac stocks rose 1.04% led by a 3.92% jump in China. DJ Americas stocks rose 2.51%
-Friday's big news was that non-farm payrolls increased 96,000 in August (55,000 with downward revisions to June/July). The consensus expected a gain of 130,000. The unemployment rate fell to 8.1% from 8.3%. Good right? Not so fast. The drop in the rate was due to the labor force declining by 368,000. Basically, more people are just giving up looking for work. On economic group estimates that 7 MILLION people are now out of the labor pool. That's 2.9% of the population. The jobs report is likely seasonal so a better report may come next month. But, this looks pretty bad.
-The ISM non-manufacturing index increased to 53.7 in August, beating the consensus expected 52.5. (Levels above 50 signal expansion; levels below 50 signal contraction.) The direction of the key sub-indexes was mixed in August but all were above 50. The supplier deliveries index gained to 51.5 from 49.5 and the employment index rose to 53.8 from 49.3. The business activity index declined to 55.6 in August from 57.2 and the new orders index fell to 53.7 from 54.3.
-The ISM manufacturing index declined to 49.6 in August from 49.8 in July, coming in below the consensus expected 50.0. The new orders index declined to 47.1 from 48.0 Nonfarm productivity (output per hour) rose at a 2.2% annual rate in the second quarter, revised up from last month's estimate of 1.6%. Non-farm productivity is up 1.2% versus last year.
-China announced a $150+ Billion infrastructure spending package to help stimulate their stagnating economy.
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Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ.
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