Greenwood Trading: Are stocks falling because the global economy is showing more signs of slowing or because central banks need to excuse quantitative easing.
According to Greenwood Trading, the recent turmoil in the financial markets has led to increased chatter among investors that the Federal Reserve may elect to pause its taper of its quantitative easing program and postpone interest rate hikes next year.
General consensus among economists is that the Fed will formally end its open-ended purchases of treasuries and mortgage-backed securities at the next meeting of the Federal Open Market Committee but with grim economic data emerging both at home and abroad and a 6% plunge in the Dow Jones Industrial Average from its September peak, many are calling into question the wisdom behind the taper and incessant talk about raising interest rates early in 2015.
“The euro zone is on the verge of entering a recession and, even with deflation looming on the horizon, the European Central Bank persists in its dithering and in the US, retail sales plunge and producer prices inflation is falling so we’re not surprised that calls for a pause or even a reversal of the taper are being called for,” said Simeon Kwanda, head of research at Greenwood Trading.
While Greenwood Trading says it believes that quantitative easing will eventually return to levels seen at the start of QE3, it says that it will take much more than the current levels of uncertainty and volatility to push the Federal Reserve in that direction.
“Fundamentally, the US economy isn’t in terrible shape; it’s growing modestly, there’s consumer activity and the jobs recovery seems to be on a relatively sustainable footing but it’s nowhere near enough to support interest rate normalization. Right now, higher rates – even 25 basis points – would choke off the recovery which, believe it or not, is in its fifth year,” concluded Kwanda.
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