U.S. Expands QE3, But Markets are Disappointed, by being Underwhelmed

Seeing today’s market activity, one becomes concerned with market responses to central bank activity. Federal Reserve today concluded their two day meeting with an announcement turning convinced speculation into what was already convincing.

That is, Fed said it would roll its “operation twist” into some $45B/month in treasury purchases. This becomes a new round of treasury purchases not seen since conclusion of QE2, in 2011. Interesting also is Fed’s tying monetary policy to a 6.5% unemployment rate, as opposed to particular dates. Seems far more logical.

What disappoints is equity responses today when Fed announced additional easing. Dow jumped up in a cheer, but closed down by three points. Currencies, namely U.S. dollar and euro, went into normal correlation with U.S. dollar down and euro up. But ended showing some sign of risk hesitation.

Overall, U.S. markets have demonstrated sound and positive responses to global central bank easing announcements. Generally leading major U.S. equity advance in recent past have been Fed’s September QE3 announcement and ECB’S Outright Monetary Transaction of September as well. Also creating equity increases was ECB's Long Term Refinancing Operation (LTRO) brought in December and expanded in February. Markets went up consistently with all these announcements.

Today, we have existing Fed purchases of mortgage backed securities (MBS), expanded into Operation Twist money going into treasury purchases starting in January. For ECB, they’ve expanded LTRO twice, and announced their Outright Market Transactions in September.

But today, in response to expanded U.S. asset purchases, equities either fell, or remained unchanged in U.S. A disappointment, at least for me.

While all central banking efforts have maintained asset prices, fundamentals for companies have not improved proportionate to central bank liquidity infusions. Or, for the matter, Europe’s LTRO and improvement for bank balance sheets.

Simply stated for companies, only about 40% beat revenue expectations, after expectations were cut several times.  Q3 earnings season saw some surprising disappointment, with Apple and Google, together with McDonalds and Caterpillar…to name a few. Look at S&P or Dow charts through Q3 earning’s season.

When European Union is in GDP contraction, and Japan joins in recession, little space exists for U.S. decoupling.

Essential is improvement in demand and willingness to invest. A U.S. budget starts confidence in growth. Especially where U.S. shows GDP growth currently.