65% Of QE3 Is Already Priced In
The major problem with daily jawboning by central bankers, such as Draghi today, and the Fed via Hilsenrath on Tuesday, is that it "achieves" to price in QE without QE actually being implemented: in essence the various central banks try to run up assets on the rumor, knowing well that with every incremental "news" event, the news will be sold ever faster, and ever more forcefully. Which then begs the question: how much QE is currently priced in, in order to determine how much more "rumor" there is to buy. According to Bank of America: not much, as a full 65% of QE 3, or the NEW QE, to use the proper iNomenclature, is by now priced in.
Here is BofA's take:
There are a few key differences between now and the past two balance sheet expansions: 1) Fiscal policy is likely to be tightening rather than loosening. 2) Global growth is much weaker. 3) The dollar is unlikely to weaken as much as it did during QE2 given the escalation of the euro zone debt crisis. 4) The realization that previous rounds of QE have not been able to stoke a stronger and more sustained economic recovery.
The market implications of QE3 will likely be a function of what is priced in by the time it is announced. Currently our model (see here for description) estimates that 65% of QE3 is priced in (Chart 8). This is much lower than before QE2 was announced. Therefore as the Fed sends stronger signals of QE3 in the near term we expect more downward pressure on yields. However, we believe that by the time QE3 is announced, the market will likely have priced it in.
Needless to say, when the Fed itself become the ultimate "sell the news" event, and the credibility of the only remaining real backstopper in town is gone, one does wonder: what then? But at least it explains why both Ben and Mario will do everything in their power to extend the period of simple jawboning without actually hitting CTRL-P. Could we hit a point when over 100% of the NEW QE is priced in then? Why of course.
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