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ISEQ lower-Quant easing awaited from Fed

Wednesday, June 20 08:59:10

The ISEQ is slightly down (9 points)this morning at 3,079 having been up in earlier trading as markets await optimistically for some serious easing from the Fed and other Central banks. There seems to be a real head of steam built up of easing expectation from Asia to Europe. Failure to deliver or delivery of too little is bound to adversely impact on markets today. Davy Stockbrokers argue for such action today in their morning summary:

Stock indices rose sharply yesterday (June 19th), with the Euro Stoxx 50 Pr up 2pc, the FTSE 100 up 1.7pc and the S&P500 up 1pc. Sentiment was buoyed by Greece's progress in forming a pro-bailout government and as a Spanish bond auction met targets, albeit at elevated yields. Equity prices rose despite a fall in the German ZEW investor sentiment survey in June into negative territory for the first time since January. Markets also appeared to shrug off the news that the audit of Spanish banks will now be delayed until September, having being expected at end-July.

Spanish ten-year bond yields remained marginally above 7pc at the close yesterday but have fallen back below 7pc in early trading this morning. In part, this decline could reflect reports from the G20 meetings in Mexico on talks to use the European Stability Mechanism fund more aggressively to bid down peripheral European bond yields. However, the only tangible policy action is an increase in the IMF's resources to $456bn, widely expected to be rubber-stamped at the G20 meetings.

Yesterday's UK CPI inflation release bolstered the case for additional quantitative easing (QE) at the Bank of England's next policy rate meeting in July. The unexpected fall in the CPI inflation to 2.8pc in May suggests that projections for the rate to fall towards the Monetary Policy's Committee's (MPC) 2pc target are on track. So any lingering concerns about price pressures in the UK economy will have been alleviated by yesterday's release. Furthermore, the fall in Brent oil prices to $95 per barrel, from as high as $120 in May, will push down on the CPI inflation rate going forward.

Today's labour market data may also suggest that medium-term price pressures are waning. The unemployment rate is expected to remain at 8.2pc, with employment growth flat on the year and annual average weekly earnings growth to fall to 0.6pc. Although the decline in nominal pay growth in 2012 largely reflects weak bonus payments, regular pay growth has also declined to 1.5pc - indicating that UK consumers are still experiencing real wage cuts. Weak pay growth bolsters the case for additional policy action.

In his Mansion House speech last week, Bank of England Governor Mervyn King indicated that the case for additional monetary stimulus was growing. So additional QE at next month's meeting now looks likely. Today markets will look to the release of the minutes of the June policy meeting to see if any MPC members joined David Miles in voting for more QE. If so, expectations for monetary stimulus in July will surely grow.

In contrast to the UK, Fed Chairman Ben Bernanke appeared to play down expectations for a QE3 package in the US in his testimony to Congress, arguing that the extent of the US slowdown had been exaggerated and that the US economy is still expanding at a modest pace. This suggests that the Fed is wary of the apparent sharp slowdown in non-farm payrolls employment growth given large revisions to the data in recent months. Hence, it is not clear that the Fed will consider additional policy action at today's meeting, with most commentators not expecting a third round of asset purchases to be announced according to Davy Stockbrokers.