Tuesday, December 23, 2014

CLSA: "Do I Hear QE4?"

From Barron's Asia Today:
A bullish call on the U.S. monetary policy – i.e., easy money – hit my mailbox today,  from Asia-based broker CLSA.

According to Christopher Wood, the well-respected equity strategist there, “‘QE4′ is more likely in 2015 than a US rate hike.” The reasoning? First, the U.S. economy is not as strong as the media likes to portray. For instance, real retail sales growth slowed to 2.5% in October compared with 6% in February 2011. Second, just like the rest of the world, the U.S. is hitting disinflation too. The University of Michigan consumer sentiment survey of five-year inflation expectations fell to 2.6% in November, the lowest level since December 2008. The five-year forward breakeven inflation rate is now at 2.23%. In recent years, when inflation hit the 2% level, the Federal Reserve restarted quantitative easing, noted Wood.

CLSA’s economist Eric Fishwick is less flamboyant than Christopher Wood and argued that the Federal Reserve will begin to raise rates in the middle of 2015. However, raising rates does not mean the end of easy monetary conditions. Fishwick’s reasoning is based on the Taylor rule. According to the Taylor rule, the U.S. Federal funds rate should be 3.9% right now, 365 basis points above its actual level – which means the Fed will want to raise its fund rates next year. However, at the slow pace expected by the market, the theoretical rate will still be lower than the actual rate, which means the U.S. monetary policy remains accommodating and investors will want to buy more assets because of the “unattractive low risk-free rates and yields.”

What it means for Asia is some more partying....MORE