November 3 2014
Are central banks throwing a progressive party?
You know, the kind of party where folks travel from house to house feasting and drinking and enjoying the proffered hospitality. For years pundits have speculated about what will happen to the U.S. stock market party when the spiked punch bowl of quantitative easing is gone. Last week, they got an unexpected answer: Come on over to Japan’s house.
On Wednesday, the U.S. Federal Reserve announced October marked the end of its third round of quantitative easing (QE). Since late 2008, the Fed has purchased trillions of dollars of government and mortgage-backed bonds in an effort to spur economic growth (by increasing liquidity and lending) and head off deflation. In October, The New York Times reported, “The good news is that economy has been growing remarkably steadily since the middle of 2009… Still, the pace of growth has been perpetually disappointing for anyone expecting or betting on a return to the pre-crisis trend.”
Not long after the Fed announced QE closing time, Japan’s central bank, Bank of Japan (BOJ), startled stock markets with a Godzilla-sized surprise – it was expanding an already significant quantitative easing program. As if that weren’t enough, the President of Japan’s Government Pension Investment Fund (the world’s largest pension fund) said the fund’s assets were being reallocated. Instead of having 60 percent invested in bonds, it would keep 35 percent in bonds and move the balance to stocks. The news electrified stock markets. Barron’s reported:
“Stocks soared around the globe while the yen plunged against the dollar and the euro. Extending the previous week’s surge, the major U.S. equity gauges ended at records on Friday, while stocks in Tokyo jumped more than 7 percent on the week to the highest level since November 2007. Not to be left out, European stocks gained 3 percent, their best weekly showing since last December.”
Barron’s also pointed out the real effect of a falling yen was to export deflation to Japan’s trade partners. The drop in the value of the yen on Friday translated into a $1,500 price cut on a $60,000 Lexus or Acura, increasing competition for luxury German automobiles.
So, what’s the next stop for revelers at the central bank fête? The New York Times speculates it may be the Eurozone.
- Data as of 10/31/141- WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)0.0270.0920.1490.1720.1410.06
- 10-year Treasury Note (Yield Only)2.3N/A22.214.171.124.1
- Gold (per ounce)-5.6-3.1-12.1-12.21.910.5
- DJ-UBS Commodity Index1-6.4-6-7.7-2.4-2.6
- DJ Equity All REIT TR Index223.618.3126.96.36.199