Looking out for a sign of further quantitative easing

VOLATILITY has returned to the forex market on the back of last week’s US macroeconomic news, adding to uncertainty about the US recovery. The Federal Reserve says it does not see the need for further quantitative easing (QE3) at this time, with the Fed’s shift to a more hawkish bias due to a string of strong economic data including a growth in jobs. Such positive data suggests that the US economy is moving towards a self-sustaining recovery, but the weaker than expected March Non-Farm Payroll numbers (NFP) may reignite concerns about the solidness of this recovery.

On Friday, the US jobs data for March disappointed, however the trend of the last four months has been positive with NFP growth averaging 212,000. Federal Reserve chairman Ben Bernanke has expressed concern that recent employment gains may not be sustained without a pickup in growth. There are troubling signs in the March employment report which suggest the US may be headed for continued sub-par employment growth. Hours worked and wages were down which means that disposable income is less. This is critical for the US as 70 per cent of GDP is dependent on consumer spending.

GDP is expected to average 2.5 per cent in 2012, but growth of 4 per cent or better and a monthly NFP number of 300,000 is needed to make a significant drop in the overall employment rate and to ensure a self-sustaining recovery. Of greater concern is that the number of people not in the labour force is at an all-time high and the ranks of long term unemployed continue to rise.

Optimism about the US recovery has generated hope that the US will lead a global recovery and has helped reduce concerns about the risk from the EU debt crisis and a slowdown in China. One month’s disappointing employment data is unlikely to dash this hope and the recent Federal Open Market Committee (FOMC) minutes suggest fresh quantitative easing is unlikely in the near future. This doesn’t mean we can forget about the hot topic of QE3 because a run of weaker US jobs data may lead the Fed to inject more cash into the economic bloodlines.