Rolling out the printing press again

DESPITE the promised abolition of boom and bust thanks to central bank intervention, the US economy seems to be in a phase that looks very much like a bust. As such, there is a growing likelihood that Fed chairman Ben Bernanke will be firing up the printing presses to fund a third round of quantitative easing. After Friday’s downgrade of America’s credit rating by S&P, Li Daokui, an adviser to the People’s Bank of China, wrote that QE3 was now more likely. Though this would be another blow upon a bruise for the US finances, spread betters should be ready to pounce upon the market movements that this would drive. Here are three factors that are driving a return of QE:

1. The keenly anticipated announcement of non-farm payroll figures for July were released on Friday. After tanking in June, many market watchers were relieved to see them come in at 117k, slightly above analyst predictions. However, any talk of a revival should be seen as greatly exaggerated. It is a telling sign of the parlous state of the US economy that the creation of 117k new jobs in a nation with a population of over 300m is seen as good news. The number of unemployed persons (13.9m) and the unemployment rate (9.1 percent) changed little in July.

As John Hardy, consulting FX strategist for Saxo Bank says: “If we get a rally on the back of this report, it won’t be because this report offers significant hope, it will be because the move in markets has exhausted itself from a positioning/sentiment or other perspective.”

2. Despite the horrid state of the US public finances, US Treasuries have been holding strong. In fact, the bills are yielding at some of the lowest levels for 10 years. But why is there this disparity between a nation that seven days ago was on the brink of default and the yields on the Treasuries of that nation? The answer seems to be that the markets have already priced in another Ben Bernanke Treasury shopping spree, funded by dollar bills hot off the press.

3. Last week saw the the longest run of consecutive drops in the Dow since 1974. The Dow dropped 10 days in a row, losing 512.76 points over a 10-day trading period, the biggest points drop since December 2008. The current situation in US equities seems eerily similar to before the second round of quantitative easing at the start of November 2010.

“The dog days have turned vicious for the market, with the Dow Jones Industrial Average plunging nearly 513 points, or 4 per cent,” says John Prestbo, editor and executive editor of Dow Jones Indexes. After a volatile Friday to end the week, the question has become: have investors finished lowering their expectations, or is there still some way to go? According to Prestbo: “Time will tell, but it’s difficult to envision a sustained rebound without some evidence that the global economy is still alive and kicking.”