I Just read an article that reminded me of an issue I had let go by the wayside recently: the issue of quantitative easing and more specifically, the 3rd round of it, or QE3. To fully grasp the concept, one needs to understand that the intricacies of the treasury market. Since the inception of QE2, the FED has thrown outrageous amounts of money at the treasury market to keep prices from falling. Despite their best efforts, prices have fallen, sending interest rates higher. I have been asked before, that if the FED is fighting a losing battle, i.e. rate are going higher despite their efforts, why do they even try? My best guess is that without the FED QE2 intervention, interest rates would be quite a bit higher than they already are.
Here is the problem: If interest rates start to run higher, it will be even harder to create a sustainable recovery in the economy as homeowner will face higher mortgage rates leading to fewer buyers. Corporate businesses would also have a harder time funding day to day activities which could induce further layoffs.
Now we have been starting to hear talk of not needing QE3. And that makes sense. If we are to believe what the FED tells us, then the economy is improving. In which case, why would we even need the drastic intervention going on at the FED? It is my opinion that we desperately need this intervention. The fact is that bond prices have fallen hard in since the start of QE2 despite hundreds of billions of dollars having been thrown at the problem.
So in order for the FED to get the go ahead from congress to run a 3rd round of QE, the public needs to believe that the economy is in dire straits. Since the public really only watches the stock market for it gauge of economic health, we may need to see a stock selloff for enough people to think that continued FED intervention is needed. Tomorrow is an ideal day for an event like this to occur.
Think about it. The market looks complacent today. We have had a gradual and consistent uptrend, with very little volume and volatility. Basically, buying but with little to no conviction. Not only that but I would bet that many people have been chopped out of the market in the past few days given all the swings and inconsistent movement. So the weak hands on both sides have been shaken out for the most part.
The NFP numbers are one of, if not the biggest trading event of the month. I am thinking we may be in for a wild ride tomorrow. The market has been pricing in a good number. Today’s weekly jobs number was strong and yesterday’s ADP number was good also. The best part is that you don’t even need a bad number for a big sell off to occur. In fact, it may even be better is the number is bullish. My guess is that weak buyers have been forced out by the recent trading action. On a bullish number, these guys would be stepping back in to buy. If the big players want this market to go down, they will have a fresh round of buyers to sell in to.
I’m not saying this will happen, but it seems like something that could happen, and I just wanted to pen it out for prosperity. This market just seems a bit too complacent for my liking.
