Goldman Pulls The Plug On More QE In 2012
One of the most vocal advocates of a NEW QE announcement next month, at either the FOMC meeting or Jackson Hole - Goldman Sachs - has just pulled the plug. From Jan Hatzius: "The US economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3%. The recent news also has implications for Fed policy. While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion." Just as we have been saying. Which means the Fed is now out of the picture until the end of 2012. And with corn prices where they are, so is the PBOC. As for the ECB - talk to Rajoy, who will do nothing as long as 10 Year yields are under 8%. Which means that, as explained previously, Spain and Italy, and in fact the entire world, must all be destroyed first, before they are saved.
Full Goldman note:
The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months. Tuesday’s data were generally in line with this expectation:
1. Stronger retail sales. The July retail sales report showed a clear upside surprise, with a 0.9% gain in sales excluding autos, building materials, and gasoline. The month-to-month strength was broad-based, with sizable gains in most core categories, although it mainly served to reverse some of the declines in the prior month.
2. Slower inventory accumulation. Inventory accumulation has slowed clearly in recent months, with book-value business inventories up just 0.1% in June, down from a peak of 0.8% in January. We believe that this slowdown has been partly responsible for the disappointing performance in manufacturing surveys such as the ISM and Philly Fed. If it is ending, that should help the manufacturing sector over the next few months.
Our proprietary measures of US economic growth have also picked up a bit further. Our Q3 GDP tracking estimate rose to 2.3% from 2.2%, our current activity indicator (CAI) now stands at 1.2% in July after 1.1% in June, and our US-MAP index of US economic data surprises is moving quickly further toward neutral readings on a 60-day exponential moving average basis.
The recent news on the pace of the recovery also has implications for Federal Reserve policy. To be clear, our own view remains that there is a very solid case for additional accommodation under the Fed’s dual mandate of maximum employment and 2% inflation. And we do believe that Fed officials will ultimately decide to ease policy further.
However, in contrast to a number of other forecasters, we do not expect a move to QE3 at the September 12-13 FOMC meeting. Although Fed officials clearly adopted a strong easing bias at the July 31-August 1 FOMC meeting, we do not think that this amounts to a pre-commitment to QE3. Instead, we believe that continued weakness is necessary to prompt a substantial easing move. And so far, that weakness is not showing up in the data. Among the top-tier indicators released since the meeting, only the July ISM manufacturing index was a (modest) disappointment. In contrast, the July employment report was at worst a split verdict, the July nonmanufacturing ISM was a bit better than expected, jobless claims have surprised on the low side over the past few weeks, the June trade deficit showed an unexpected decline, and the July retail sales report surprised on the upside.
Other factors have also, at the margin, swung against the expectation of aggressive near-term easing. The inflation outlook has become a bit cloudier in the wake of the recent recovery in commodity prices; while Tuesday’s upside surprise on producer prices was largely driven by volatile sectors such as vehicles and tobacco, underlying price pressures were also a touch firmer than we had expected. Moreover, our GS financial conditions index has now fully unwound the tightening seen in the second quarter, and we have found previously that the meeting-by-meeting probability of Fed easing is quite sensitive to financial conditions.
To be sure, the uncertainty around the near-term trajectory of Fed policy remains substantial. Several FOMC meeting participants, specifically Presidents Evans, Rosengren, and Williams, are making the case for additional easing via potentially open-ended balance sheet expansion. And it might well be that Chairman Bernanke will use his speech at the upcoming Jackson Hole Symposium to explain why the Fed’s mandate calls for further accommodation in the near term. We will be receptive to these messages and will review our monetary policy forecasts as needed. But our call remains that the return to QE will not happen until late 2012/early 2013, and at the margin the recent data have made us a bit more confident.