Much has been made of the positive impact that seasonal adjustments have made to the crop of supposedly better than expected macro prints that remain anecdotal evidence of why the S&P 500 is trading above 1400 again. Unfortunately the pleasant after-glow of a time-series-based adjustment that has become increasingly unstable and hard to justify post-crisis is starting to fade. Morgan Stanley's Business Condition Index dropped a very significant 5 points in March to 51%. Just as pointed out here (in Bernanke's scariest chart [3]) the seasonal factors are almost entirely responsible as the trend of recent data is just not meeting expectations (both in analyst and market perceptions). Under the surface, things are a little gloomier also as their Hiring Plans Index dropped for the first time in six months and the business conditions expectations plummeted 11 points to 57% in March. Given this (leading) data, is it any wonder MS believes QE3 is inevitable and imminent? Though as we have noted again and again, until the market starts to get the sad joke that unless market momentum chasers start to defect from the current strategy, we suspect the impact of QE3 (if it comes) will be far more muted (in stocks) than the previous acts of exuberance by the Fed (and their buddies) - as implicitly the cost of the much-higher-than-normal strike price of Bernanke's put means ever-increasing QE needs to counter underlying weakness/perception.
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Source: Morgan Stanley