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Notes to myself, possibly of interest to others.
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Tuesday, October 5, 2010

Jeremy Siegel - Some actually cogent observations

The most important news next week is of course the payroll: The expectation is for +75k private payrolls, but a continued loss of government jobs. Some forecasters, such as JPM Morgan expect a 120k loss of government jobs because of weak teacher hiring, leading to an overall payroll loss of 40k. The unemployment rate is apt to rise, either to 9.7% or 9.8%. I think a print of 9.8% and a loss of 40k would not be welcomed by equities...

Treasury bonds continue their strength with the 10-year touching a new low of 2.446% on Tuesday afternoon. Virtually all the Treasury strength is due to expectations of quantitative easing. Without the expectation of QE, I believe yields would be about 3%. This means that if the widespread consensus that the Fed will engage in QE falters, there would be a sharp pullback in Treasuries.
Bill:  NB Rosenberg does not agree.  I semi-agree, although the overall trend is down in yield -> up in price for treasuries.  Watch out for continued upside "surprises" on stocks though.  Everyone is predicting such.
Certainly NY Fed President Dudley, a dove, asserted that further Fed action was needed stimulate the economy, but Philadelphia Fed President Plosser, a hawk who will rotate into a voting position next year, did not see the case for QE. Looking at the inflation indicators, there is nothing in the data to suggest the Fed is any closer to buying bonds. The dollar has been very weak, ending one of its worst months in years against both the developed and emerging currencies. As a result commodity prices have been strong, gold is touching new highs, and oil soared to $81.58 a barrel. Is this a climate that the Fed would describe as “deflationary”? QE is by no means a done deal. The next FOMC meeting isn’t until November 3.
Bill:  I agree QE2 is not a done deal.  I think Bernanke is willing to go massively into QE2, but is waiting until the last last minute mainly due to elections.  As much as I agree with Rosie about the overall deflationary scenario, I think the Fed will avoid QE2 until it just can't.
Jeremy Siegel 

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