So, did you enjoy Bernanke's speech this morning? Jan Hatzius didn't, at least from a 'we need QE2' standpoint. His comments:
From Hatzius:
BOTTOM LINE: Chairman Ben Bernanke adopts a cautious approach to his speech, reiterating that he sees a case for adopting more stimulus but that any decision depends on the costs and benefits of the nonconventional policies. The speech contained few details of what form additional easing could take, although Bernanke clarifies that he regards additional asset purchases and/or a tightening of the FOMC’s guidance language as the primary tools. Overall, the speech is consistent with our expectation of a QE announcement in November.
MAIN POINTS:
1. Chairman Bernanke re-emphasizes the FOMC’s dual mandate of attaining the longer-run sustainable rate of unemployment and mandate-consistent inflation. With regard to the former he argues that “the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity … rather than to structural factors.” Bernanke thus refutes the idea that labor market mismatch has pushed up the structural unemployment rate significantly. Given this large amount of slack, Bernanke notes concludes that “it is reasonable to forecast that underlying inflation…will be less than the mandate-consistent inflation rate for some time.” The tone of this speech is consistent with the "bite size" approach to asset purchases that we have come to expect in the wake of earlier speeches rather than a "big bang" approach.
2. Given this deviation from the FOMC’s mandate he argues that “there would appear--all else being equal--to be a case for further action.” However, Bernanke is careful to stress that “possible costs must be weighed against the potential benefits of nonconventional policies.” The chairman provides few specific details but clarifies that he sees asset purchases and forward guidance as the primary unconventional tools too boost the economy. His remarks contained no comments on price level or nominal GDP level targeting.
Summarizing a complete conspiracy theorist: Jan is saying that Ben will NOT be doing QE2 and in the process he'll "preserve some of the Fed's mystique".
I would a love a non-event QE2. Either the kind where the Fed says, "we're going to do $1 Trillion in easing and oh yea, by the way, we've already done $500 million-ish" OR the kind where they say, "you know what, we are seeing some good data leaking out of all sectors and that means we don't need stimulus!" If this was to happen, I would imagine a 2 day correction in the S&P of 5-7% with a one week target of 10-12% bottom line support. That would help explain some of the current pricing and fear in the S&P combos that are currently priced at 3.7 to 1 for the put. {ie vs 1170 in the SPX the 1075-1275 combo cost 10.75 to the put, $14.75p v $4.0c}. Market makers aren't going to let you just get long downside OTM put for nothing, you've got to pay a hefty sum for the rights of protection. Baby steps to November 2nd!
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| One "Ben" just came off of suspension, the market will be calling for the other one be suspended if QE2 doesn't happen! |
~LH
