QE3

The markets have been extremely focused on the likelihood (or not) of a further quantitative easing being announced by the U.S. Fed.

It may be noted that though the FOMC minutes for the meeting held on July 31 have clearly spelled out that a final decision regarding QE3 would be taken at the September meeting, markets have been vigorously analyzing emerging economic data to assess the chances of it materializing. As a result, there is considerable focus also on Chairman Ben Bernanke’s statement tomorrow at the central bankers’ meeting at Jackson Hole, for likely clues to the Fed’s thinking in this regard.

At the time of writing, the Dow Jones Industrial Average (INDEXDJX:.DJI) is solidly in the red, and trading at 13040, with a loss of 0.51%. The NASDAQ Composite (INDEXNASDAQ:.IXIC) is off by 0.76% and the
S&P 500 (INDEXSP:.INX) is down 0.54%.

Markets appear to have been spooked, ironically, by economic data emerging from the U.S., that shows a gathering improvement.

Quarterly GDP for the second quarter was revised from 1.5% to 1.7%.

A survey of economic conditions, published as the Federal Reserve Beige Book, pointed to clearly improving conditions in the housing market and much better retail spending, with unemployment not increasing.

Meanwhile today’s data on jobless claims showed a number of 374,000, which was unchanged from last week, but worse than the market expectation of 370,000.

Consumer purchases for July increased 0.4 percent, while incomes climbed 0.3 percent for a third month.

Yesterday’s release of the index of pending sales of existing homes for the month of July, prepared by the National Association of Realtors, showed a growth of 2.4% to 101.7 from last month’s reading, according to the WSJ. On a year-on-year basis, the index was higher by 12.4%. The index also surpassed economists’ expectations, who had called for only a 1% increase over the last month. The S&P/Case-Shiller index of 20 metropolitan areas revealed that prices of homes climbed 0.5% on a year-on-year basis, with reference to June last year. The number was significant, more for the fact that a positive reading emerged after a streak of declines through 20 months. These results point to a gathering recovery in the housing market.

Meanwhile figures showed today that retail sales surged in August, as 89% of the 20 companies that reported beat estimates.

Taken together, the above data shows an economy that is slowly recovering but definitely not in crisis mode. All told the data casts significant doubt on whether the Fed may ultimately decide to go for another bout of QE.

According to a Reuters global asset allocation poll today, only 44% of fund managers are now of the view that a third QE round will materialize.

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