False Alarm: Morgan Stanley Recants From Its Expectation Of A QE2 Event In One Week

Today's peculiar stock trading action was exclusively due to Morgan Stanley's previously highlighted expectation that the Fed would announce QE 2 in one week (and had nothing to do with Hatzius' announcement that there may or may not be a November event: Hatzius has been claiming this for two exactly months running now, for all those to whom this may be news). Which is why David Greenlaw's just released announcement which essentially eliminates MS' expectation of a hike may wreak some havoc on stock prices tomorrow (and potentially gold, although now that it has passed a new psychological level, we think the odds of that happening are modest). Quote David Greenlaw: "we now believe the likelihood of additional easing being announced at the Sept FOMC meeting is quite low (perhaps 10% to 20%)." Sorry, no QE2 for at least two months, and most likely not until January, but which point it will be too late to do any actual good to the economy (but not to surging gold prices).

The minutes from the August FOMC meeting indicated that "the Committee would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further."  Bernanke said pretty much the same thing in his Jackson Hole speech. Up until a couple of weeks ago, we believed the odds of additional monetary stimulus being implemented at the Sept meeting were relatively high (close to 50%).  But, the probability declined in the wake of the latest employment report and continued to decline up through and including the retail sales report that was released this morning. So, we now believe the likelihood of additional easing being announced at the Sept FOMC meeting is quite low (perhaps 10% to 20%).

Nonetheless, those who have listened to MS and purchased rates vol insurance in the form of Variance Swaps are already modestly in the money.