QE: What's Different This Time?
Manoj Pradhan, Morgan Stanley
QE was introduced because the transmission mechanisms of traditional monetary policy were broken, and was designed to best take advantage of the parts that still worked. At the risk of oversimplifying things, we would argue that passive QE (where private institutions call the shots) is better equipped to deal with tail risks while active QE (where the central bank dictates terms and hence delivers a clear policy signal) is better placed to deal with the base case, though an overlap between the two clearly exists. Seen through this lens, the ECB's LTROs (passive QE) have reduced tail risks, but more needs to be done to stimulate the euro area economy, as Joachim Fels and Elga Bartsch have argued. ‘QE à la Fed' - active QE-mandated purchases of assets - remains the gold standard, in our view. The arrival of its latest edition in the US (particularly if it is pre-emptive in that it arrives before growth weakens) and also in Europe could help to push global growth closer to a sustainable trajectory. Both the timing and the design of these packages are important, and the key players - investors and emerging markets - are readying themselves.
FX: GBP Weakens Again
Kasper Kirkegaard, Senior Analyst, Danske Bank
There is much to suggest that GBP/DKK has topped out for now – and we do not expect the peak of just over 9.00 reached in early January to be seen again anytime soon. However, like so much else, whether it is depends on how the euro crisis develops and the pound is still closely correlated to the dollar.
Cyclical Recovery and Continued Low Interest Rates thru 2014? An Uneasy Truce
John E. Silvia, Chief Economist, Wells Fargo
Winning a battle does not mean winning a war in the battle of supply and demand in the credit market. In the short term, the Fed’s provision of liquidity may keep interest rates low for now, but we are skeptical of the ability of the Fed to keep both short and long-term rates this low through 2014. Economics will dominate policy and the bias, certainly for long rates, will be on the upside. Investors should be skeptical of policy intentions in the face of real-world developments.
United States – Moving Forward, Slowly But Surely
Martin Schwerdtfeger, Senior Economist,TD Bank Financial Group
Greek debt talks dominated headlines once again this week. Negotiations between Greek political leaders and EU/IMF officials led to a tentative agreement on further austerity measures that would enable the latter to sign off on the second Greek bailout program. The initial positive reaction faded late on Thursday when European officials made clear the program will not be finalized until the Greek parliament passes the new austerity measures. The vote is scheduled on Sunday. At the time of writing, the S&P 500 was down 0.8% on the week, and European stocks were in the red by an even larger margin.
Compiled by David Song, Currency Analyst
