Trading places

Though the signal from central banks was relatively subtle, expectations for another round of QE in the US and UK took a decisive shift yesterday.

Here's the words that triggered this move:

- 'The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed' (FOMC policy statement.)

- ‘For some members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased’ (MPC September minutes)

While this doesn't make QE2 inevitable, it’s exactly the kind of shift in tone City analysts have been waiting for. Some are now forecasting QE in both economies as early as November. (e.g. Goldmans for the US, RBS for the UK.)

The resultant rally in bonds isn't surprising - further asset purchases should directly depress yields. Perhaps the limited/slightly negative reaction in stocks is more disturbing. Either equities already had further stimulus priced in (which is possible given their recent resilience) or investors are becoming more sceptical about the effectiveness of such policies.

Macro Maestro has expressed his concerns about the effectiveness of QE2 before. For now he'd just like to point to this. According to the FT, the Fed is going to try BoE-style QE (buying bonds). But last week, the BoE suggested further stimulus would come from Fed-type credit easing. So both central banks are ditching the QE they tried before and switching to the other's previous favourite. Does anyone else find this slightly disturbing (and ironic)?