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QE Expectations and Market Reactions
 

QE Expectations and Market Reactions

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There was no single catalyst for rising yields in the US Treasury market and the sector rotation in US equities. Recent US budget reports show stronger than expected tax revenues, suggesting a much ...

There was no single catalyst for rising yields in the US Treasury market and the sector rotation in US equities. Recent US budget reports show stronger than expected tax revenues, suggesting a much more rapid drop in the projected deficit than had been anticipated due to the good health of the economy. Speeches and testimony during May from Fed Chairman Ben Bernanke and other FOMC members suggest a tapering off of quantitative easing could be announced in the second half of 2013 if the unemployment rate continues its slow descent.

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    QE Expectations and Market Reactions QE Expectations and Market Reactions Document Transcript

    • 1 market insightsQE Expectations and Market ReactionsnsightsMarketWas May 1st a Turning Point?On 1 May 2013, the US Treasury 10-Year Note closed at a 1.63%yield, its low point for 2013 year to date, and shortly thereafterstarted rising—taking it over 2.2% before settling back a little.The day before, 30 April, the S&P500 Utility sector index hadclosed at its high for the year, before heading on a downward pathin synch with rising yields in Treasuries. By contrast, the S&P500Financials kept powering higher, extending their 2013 rally.June 4, 2013By Blu Putnam, Chief Economist, CME GroupThere was no single catalyst for rising yields in the US Treasurymarket and the sector rotation in US equities. Recent US budgetreports show stronger than expected tax revenues, suggestinga much more rapid drop in the projected deficit than had beenanticipated due to the good health of the economy. Speeches andtestimony during May from Fed Chairman Ben Bernanke and otherFOMC members suggest a tapering off of quantitative easing couldbe announced in the second half of 2013 if the unemploymentrate continues its slow descent. Economic data during May wasgenerally supportive of a growing economy, yet in no way conclusive.Housing certainly looks strong.The labor market is trending around175,000 net new jobs per month, but with a rather wide band ofnoise, say 150,000 to 200,000. Indeed, the February payrolls datawas significantly above the noise band while the March data wasa little below the noise band. Other economic data are also showingconsiderable volatility, making verification of a more robust economya difficult task.Nevertheless, by the last week in May, market participants wereclearly active in managing their financial exposures in anticipationdown the road of a US Treasury market without guaranteed monthlybuying from the Federal Reserve. CME Group rates sector tradinghit record highs and took total trading volumes to a new recordas well.The US stock market was in a major sector rotation, withthe steady dividend-paying utilities taking the hit, while sectorsbenefitting from a robust economy continued their upward paths.A Data-Driven Fed and MarketWhat has become reasonably clear is that questions about thetiming of when the Fed starts to taper its quantitative easing programare the market focus of the day.All signs from the Fed are that itsdecision process is nearly completely data driven.That is, the Fedwants to see verification in the economic data that the US economyhas powered through the modest tax increases and sequestrationchallenges before it takes its lead-foot off the QE accelerator.
    • june 4, 20132 market insightsThere are policy consequences from the Fed waiting to see thewhites of the eyes of the economic data.And it is worth noting thateconomic data when an economy is shifting gears toward improvedperformance is notoriously volatile. No one economic indicatoror one month’s piece of data is likely to be conclusive.The Fed willbe looking at multiple indicators with 3–4 month moving averagesto smooth the data and verify trends.A data-driven Fed has often meant in the past that the Fed wouldkeep its foot on the accelerator (or brake) too long.There are longand variable lags in monetary policy, and we have argued theyare longer this time around, yet still most definitely in operation.By being data-driven rather than having the confidence to adjustincrementally with the early signs from an improving housingmarket, solid stock market, rising tax revenues, and steadyunemployment rate declines, the probability is rising thatmany seeds of more inflation to come have been sown—it isjust that the inflation will be the last set of data to reflectthe improved economy and accommodative monetary policy.Read a recent CME Group report on inflation “US Inflation,Delayed Not Denied” issued May 2013.All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of theauthors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or theresults of actual market experience.CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile.Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. New York Mercantile Exchange and NYMEX areregistered trademarks of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc.The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions.Although every attempt has been made to ensure the accuracy of the information within this brochure. Additionally, all examples in this brochure are hypotheticalsituations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.Copyright © 2013 CME Group. All rights reserved.