QE2 IS LIKELY TO BE ABOVE $1 TRILLION

 
David Morris
CFD MARKET STRATEGIST, GFT

FEW analysts now doubt that the Federal Open Market Committee (FOMC) will announce another round of quantitative easing (QE) at its November meeting. In fact, speculation has turned to the harm that Fed inaction could cause to the markets. After all, equities have been a one-way bet ever since QE2 became a possibility in late August. US Treasuries have also benefited, the dollar has plunged and precious metals, crude oil and other commodities have soared. If the Fed is desperate to boost price inflation, it is going the right way about it, even though the CPI – its favourite inflation measure – suggests a more benign outlook.

Speculation has switched from whether QE2 happens or not, to its likely size, scope and duration. Since the markets absorbed $1.7 trillion in the first round, anything below $1 trillion is likely to be a disappointment. Conversely, anything much above this could panic investors as it would point to an economy on life support. Some analysts believe that the Fed will trickle stimulus in without stating an upper limit.

But it’s not just the Fed contemplating further asset purchases. Tomorrow, we will see the minutes of the last Monetary Policy Committee (MPC) meeting, which might give some clues as to the likelihood of additional QE in the UK. The MPC is dealing with a stubbornly high inflation rate, so Thursday’s inflation report hearings will be important, particularly as they follow hot on the heels of Wednesday’s comprehensive spending review.

We have US housing starts and building permits today, the Fed’s Beige Book tomorrow and the first look at Chinese third-quarter GDP and CPI on Thursday. Rounding off the week, we’ll have the German Ifo Business Climate survey and the first day of the G20 meeting of finance ministers and central bankers.

Meanwhile, the US third-quarter earnings season gathers pace. Although there have been some positive reports in the tech space, the financial sector remains under pressure. With growing unease about the unwinding foreclosure debacle and worries that further fall-out from the subprime crisis is about to emerge, US banks will continue to struggle.