Global Risk Watch
CIO WM Research
7 September 2012
Global risk watch
Fed to announce QE3
• We now expect the FOMC to announce a third round of quantitative easing (QE3) at its meeting on September 13. The FOMC is also likely to extend its commitment to hold the Fed Funds rate at an extraordinarily low level.
Thomas Berner, CFA, economist, UBS FS thomas.berner@ubs.com Brian Rose, strategist, UBS FS brian.rose@ubs.com Jeremy Zirin, CFA, strategist, UBS FS jeremy.zirin@ubs.com Stephen Freedman, CFA, strategist, UBS FS stephen.freedman@ubs.com Thomas Flury, strategist, UBS AG thomas.flury@ubs.com Giovanni Staunovo, strategist, UBS AG giovanni.staunovo@ubs.com Dirk Effenberger, strategist, UBS AG dirk.effenberger@ubs.com
• Market expectations for QE3 appear fairly high at this point, which could limit the reaction to the FOMC announcement.
• We see a 30% risk of the FOMC deciding not to implement QE3.
In this event we would expect most risk assets to sell off. Base case for more Fed action on weak economic growth The jobs report for August was disappointing, with nonfarm payrolls expanding by only 96 thousand. Earnings were flat, and the average number of hours worked ticked lower. The unemployment rate fell to 8.1%, down from 8.3% in July, but it fell for the wrong reason-- a decline in labor force participation. The jobs data appears roughly consistent with our forecast of a 1.5% annualized growth rate in third quarter GDP. For the Fed, that does not represent the "substantial and sustainable improvement" in activity they say is necessary to head off further monetary accommodation. Given Fed Chairman Bernanke's dovish comments in his recent Jackson Hole speech and the disappointing jobs report, we now see a 70% chance that the Federal Open Market Committee (FOMC) will announce a third round of unsterililzed quantitative easing (QE3) at its meeting on September 13. This is likely to consist of Treasury and Mortgage Backed Securities (MBS) purchases. We also expect the
7 September 2012
Global risk watch
Fed to announce QE3
• We now expect the FOMC to announce a third round of quantitative easing (QE3) at its meeting on September 13. The FOMC is also likely to extend its commitment to hold the Fed Funds rate at an extraordinarily low level.
Thomas Berner, CFA, economist, UBS FS thomas.berner@ubs.com Brian Rose, strategist, UBS FS brian.rose@ubs.com Jeremy Zirin, CFA, strategist, UBS FS jeremy.zirin@ubs.com Stephen Freedman, CFA, strategist, UBS FS stephen.freedman@ubs.com Thomas Flury, strategist, UBS AG thomas.flury@ubs.com Giovanni Staunovo, strategist, UBS AG giovanni.staunovo@ubs.com Dirk Effenberger, strategist, UBS AG dirk.effenberger@ubs.com
• Market expectations for QE3 appear fairly high at this point, which could limit the reaction to the FOMC announcement.
• We see a 30% risk of the FOMC deciding not to implement QE3.
In this event we would expect most risk assets to sell off. Base case for more Fed action on weak economic growth The jobs report for August was disappointing, with nonfarm payrolls expanding by only 96 thousand. Earnings were flat, and the average number of hours worked ticked lower. The unemployment rate fell to 8.1%, down from 8.3% in July, but it fell for the wrong reason-- a decline in labor force participation. The jobs data appears roughly consistent with our forecast of a 1.5% annualized growth rate in third quarter GDP. For the Fed, that does not represent the "substantial and sustainable improvement" in activity they say is necessary to head off further monetary accommodation. Given Fed Chairman Bernanke's dovish comments in his recent Jackson Hole speech and the disappointing jobs report, we now see a 70% chance that the Federal Open Market Committee (FOMC) will announce a third round of unsterililzed quantitative easing (QE3) at its meeting on September 13. This is likely to consist of Treasury and Mortgage Backed Securities (MBS) purchases. We also expect the