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Are We Beyond QE?

Nick Kalivas

The Fed’s taper has been a topic for weeks. If you are like me, you are tired of the conversation and would like to turn your attention to other market factors.

For example, the August Japanese manufacturing PMI rose 1.5 to 52.2 overnight and joined the flash August Chinese and EZ PMIs in implying economic expansion.  The U.S. August ISM is expected to dip 1.9 to 53.5 Tuesday, but the drop is coming after a surprise surge in July and would argue against material weakening in the manufacturing sector. Bottom line, the PMIs are favorable for growth, albeit we are far from a boom. The PMIs also seem to imply non-financial corporate profits will improve sequentially in Q3 assuming the September data behaves.

Further, last night South Korea reported its July retail sales rose 1.1% m/m after a 0.9% m/m gain in June – not every emerging economy is crashing.

It seems like a majority (it may be a small one) of players in the market are expecting a taper announcement at the September FOMC meeting, and the Fed to cut the size of its treasury purchases by $10 to $15 bln per month to get the ball rolling. However, after my weekly review of the Fed’s balance sheet, I realized that the S&P 500 has been moving sideways since about the middle of May, while the Fed’s balance sheet had expanded about $300 bln.

There has been divergence between the series and one of the largest since the QE operation got under way last year.  The graphic displays the relationship between the size of the Fed’s balance sheet (reserve bank credit) and the direction of the S&P 500. Add to this the fact that money market fund assets have risen $60 bln since the middle of May in a zero rate environment.

RTI Questions:  1) Do you think the market’s sideway price action has been enough to price taper or is a break toward the June low in the 1590 area or lower needed to make the pricing more final? 2) Are you looking for a positive reaction to FOMC announcement regardless of the Fed’s action?

Let me know your thoughts below:

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