Russia’s crude oil exports dip…
The energy crisis in Europe…
We believe that the “Bernanke put” is the main culprit for the price premiums in the commodity sector. The US central bank has repeatedly pointed out the positive effects of higher share prices, although this could trigger unsolicited secondary effects. The improved wealth (and increased optimism) boosts the propensity to consume among households and the propensity to invest in the corporate sector, which in turn supports the economy. The improved growth perspectives also lead to a decline in risk aversion. Commodities, too, benefit from the increased willingness to assume risk, as the following chart illustrates impressively. The extremely high positive correlation between equity market and oil price is hardly explained by ordinary supply/demand patterns; the monetary policy seems to have contributed significantly. The liquidity provided by the central bank may have been invested directly in these segments (i.e. commodities may have been bought on a speculative rationale rather than on the basis of demand from producers) due to the global growth expectations. It is therefore fair to assume that the rally is primarily driven by liquidity.
Oil (left scale) vs. S&P 500 (right scale) since 2001
Sources: Datastream, Erste Group Research
The fact that the oil price seems to have responded to previous QE rounds by the Fed also raises the question to what extent Central Bank easing (in particular, the Fed) is likely this year?
The price of Brent and QE phases (from the announcement of the respective new purchase programme onwards) |
Source: Datastream, Erste Group
The question whether the Fed will launch a new purchase programme (QE3) this year remains dubious, from our point of view – but the balance sheet would remain constant (refinancing of expiring papers). In the last Fed minutes only a few members stated that the current and expected economic development could soon necessitate further purchases. Others regarded that step as only necessary in case of a slowdown in growth or inflation rates below 2%. The latest economic forecasts by the Fed seem on the optimistic side, even slightly lower growth would not entail a slowdown, and the labour market has recently seen some good development (newly created jobs, unemployment rate). We do, however, envisage intermittent setbacks and persistent structural problems (long-term unemployment, discouraged jobseekers etc), which the Fed has also pointed out. The Fed believes that this situation is strongly connected to the housing market (jobs in the construction industry, dampened demand). Purchases, if any, should therefore take place in the MBS segment.
Bernanke had already analysed the efficiency of the measures available beyond the Fed funds rate back in 2004: verbal intervention (promise to leave the interest rates low for a long time in order to push the long-term rates down), quantitative easing (expansion of the central bank’s balance sheet via an expansion of liquidity and/or bond purchases), and credit easing (purchases in specific market segments, e.g. Operation Twist or MBS purchases). From Bernanke’s point of view, the latter constituted more efficient support for the economy, and according to NY Fed President William Dudley it helped avoid potential “dislocations” on the Treasury Markets. On the basis of QE1, we expect that the possible volume of purchases could be in the vicinity of USD 600bn. Overall, therefore, further purchases by the Fed remain uncertain, but if they were to come through, they would 1) happen in the MBS segment, 2) amount to about USD 600bn, and 3) take place presumably in the first half of 2012.
New FED-members rather in favour of purchases:
S. Pianalto: “… some economic policy models indicate that monetary
policy should be even more accommodative than it is today. And this is
true even after accounting for the LSAPs the FOMC has initiated to
compensate for the fact that the federal funds rate cannot go below zero.”
D. P. Lockhart: “I think slow progress toward full employment justifies
continuing consideration of whether more can and should be done. So
for me as a policymaker, now is not a time to lock into a rigid
J.C. Williams: “I expect inflation to come in under 1.5% this year and next.” Following the speech, he mentioned to reporters that this implies that he that he sees a “strong” case for new purchases of mortgage bonds.
It is important to bear in mind though that the Fed is not the only central bank to follow the “Bernanke Program”. The 3Y operations of the ECB, which have so far seen demand worth EUR 500bn, are of the quantitative easing category (albeit with an expiry date – 3Y!), and the Securities Markets Programme is a form of credit easing. The expansion of the ECB liquidity should last about as long as the government debt crisis is dragging on (i.e. potentially for quite a while). And, of course, the Bank of Japan is the QE trendsetter, having just decided on an expansion. It offers an interesting example that an increase in central bank liquidity can contribute to price increases in some market segments, but does not have to cause inflation every time and everywhere.
By. Ronald Stoeferle of Erste Group
Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.
Ronald is a metals analyst at Erste Group. Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4…