By: Patti Domm
Some investors are hoping for a case of deja vu — that the Fed may hint at more stimulus at its annual Jackson Hole gathering as a panacea against a worsening economic outlook.
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AP Federal Reserve Bank Chairman Ben Bernanke |
However, the buildup to the Fed's annual meeting in Jackson Hole, Wyo., at the end of the week is likely to prove bigger than the event itself.
Fed Chairman Ben Bernanke's speech there this coming Friday has been a major focus for markets and comes as investors fret that perhaps the economy is too weak to jump start itself.
It was at the Fed's Jackson Hole meeting last year where Bernanke first suggested the idea of a new quantitative easing program, later known as "QE2," so there are some expectations he could speak in favor of a "QE3."
The Fed also meets as weak third-quarter economic data has economists slicing their growth forecasts to extremely sluggish levels. Goldman Sachs economists Friday evening slashed growth forecasts for the third time this month. They now see third quarter GDP at 1 percent and fourth quarter at 1.5 percent, both down from 2 percent.
A number of economists who follow the Fed doubt Bernanke will announce any major new policy initiatives, and they also have said the bar is still high for quantitative easing. "I think he's going to lay out options they have, and I think we know what those options are. I don't think he's going to pull anything else out of his hat. I don't think it's going to say: 'Here's what we do next,'" said JPMorgan economist Michael Feroli.
Goldman economists said they expect there will be a detailed discussion of the potential for more easing through large-scale asset purchases, or QE. They say investors already expect more quantitative easing and they cite a recentCNBC survey that showed more asset purchases may already be priced in.
What's the Fed to Do?
Bank of America Merrill Lynch economist Michael Hanson points out in a note that Bernanke did not promise QE2 at the last Jackson Hole meeting. He merely suggested it. The Fed's voting members support for the plan evolved over time, and they were on board by early October. "..while he kept open the door for additional easing, he was not definitive at the time and emphasized both the costs and benefits of such action," he noted.
"Bernanke is likely to review the policy options still available, but this is neither the time nor place for a significant change to the Fed's policy stance, in our view. We thus see a high risk that Bernanke disappoints the markets and reiterates, rather than augments, the recent FOMC statement," Hanson wrote.
The Fed, after its Aug. 9 FOMC meeting, surprised the markets by stating that the extended period of time it expects to hold rates at very low levels is through mid 2013. The Fed also said it was considering its options.
"They have taken a new policy approach by announcing a longer term commitment" to low rates, said Citigroup economist Steve Wieting. "The Fed can also clearly articulate its goals, be very goal specific...We do think the chances are pretty high that the Fed will shift the composition of its portfolio to longer-term securities from short. If that led to a decline in forward rates and makes private capital costs fall that could be helpful."
But as for more quantitative easing, "you have to question the effectiveness" of another round, said Wieting. "The desire on the part of the Fed to act, I think, is lessened. The forward outlook on inflation is more stable and firm now than it was a year ago." He said a condition that might spur the Fed to act would be if unemployment started to rise again.
Under QE2, the Fed purchased $600 billion in Treasury securities, up until June 30. The program has been credited with driving up stock and commodities prices as the Fed expanded its balance sheet to nearly $3 trillion.
"I think when we look at what QE2 did, it was really good for P/E multiples," said Doug Cliggott, U.S. equity strategist at Credit Suisse. "But in retrospect, I actually, as a citizen, am really disappointed as to how little impact it had on economic growth. It may have been that outcomes would have been worse."
Cliggott said the stock market has broken into a new, lower trading range since the Fed ended QE2. If there is another round of QE, he sees any market gains as short-lived. "It might be (higher) for a little while. Any boost to P/E multiples from QE could easily be overwhelmed by a sort of negative earnings outlook for 2012," said Cliggott.
"We seem to be in a new lower trading range now that the Fed has stopped doing asset purchases. It's a broad one.. between 1100 and 1300 on the S&P. Unfortunately, if we do break out of that range, the risks are to the downside," he said.
What Else to Watch
Besides the Fed, markets will watch developments in Europe's sovereign debt crisis, which continued to send shockwaves across world markets in the past week. For the week, the Dow lost 4 percent to 10,817; the S&P 500 was down 4.7 percent, and the Nasdaq was down 6.6 percent at 2341. The dollar lost a percent to both the Swiss franc and euro. The yield on the 10-year bond fell to 2 percent, but even dipped below that level at one point on Thursday.
The finance ministers of France and Germany meet Tuesday to work on details of a draft plan announced this past week by German Chancellor Angela Merkel and French President Nicolas Sarkozy which calls for a more rigid and cohesive fiscal structure for the euro zone nations. They also proposed a new financial transaction tax, but did not propose a new euro bond or bigger bailout fund, two things favored by markets.
European Central Bank President Jean-Claude Trichet will also be in Jackson Hole, and he speaks Saturday morning on policies for long run growth.
Econorma
Economists have been ratcheting down their growth forecasts this past week, and the odds of a recession have risen. Both Feroli and Wieting shaved their GDP outlooks this past week. Feroli cut fourth-quarter GDP to 1 percent from 2.5 percent and now forecasts just 0.5 percent growth for the first quarter of 2012, from a prior forecast of 1.5 percent.
He also puts the odds of a recession at 40 percent.
He also puts the odds of a recession at 40 percent.
Wieting trimmed his 2011 full year GDP forecast to 1.6 percent fom 1.7 percent and 2012 to 2.1 percent from 2.7 percent. He also cut S&P 500 earnings per share to $97 from $98, and 2012 to $101 from $105.
Some analysts believe the 16.5-percent decline in the S&P in the last four weeks reflects recession. "There's extraordinary uncertainty about what was going to happen in terms of fiscal policy here, fiscal policy in Europe.. what if anything would we do if we started to slide into a recession. We thought that mosaic would put a lot of downward pressure on P/E multiples, especially when the Fed got out of the business of supporting asset prices," Cliggott said.
Cliggott's current year end S&P target is 1275 but he is currently reviewing it for a possible downward revision. "If next year is going to be a recession, 1100 is not the bottom on the S&P." He also said it's hard to say whether there will be a recession. "It's a coin toss," he said.
"But what may be more important than whether it's up or down are gradations of it. If we go down and Europe goes down, and that really slows China and Brazil down, and then the dollar strengthens, every one of those processes are negative for earnings," said Cliggott.
Economic reports in the coming week include new-home sales Monday, durable goods Wednesday, and weekly jobless claims Thursday. A second reading on second quarter GDP is released Friday, as is consumer sentiment for August.
There are also three Treasury auctions of $99 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.
Earnings in the coming week include Suntech Power Monday. Heinz, Medtronic, Williams-Sonoma, Trina Solar and Hain Celestial report results Tuesday. Wednesday's releases include WPP, American Eagle, Guess and Applied Materials. Pandora, Ahold, Hormel and Seadrill report Thursday, and Tiffany, Royal Bank of Canada and Madison Square Garden report Friday.
Questions? Comments? Email us at marketinsider@cnbc.com
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