QE2 - Performance Out of the Blocks
The Fed announced its latest quantitative easing (QE2) plan yesterday. The $600 billion plan was near the expected numbers I'd seen tossed around in the news, so it should have been largely priced in to the market.
The purpose of QR2 is to "promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" by injecting dollars into the market place with the purchase of longer dated Treasuries. According to the NY Fed statement, most of those securities will have maturities of 2.5 - 10 years. One assumes the Fed is trying to pull interest rates in that part of the curve down.
To get a feel for how the plan was recieved by the markets, I took a look at several ETFs and compared their prices at 2pm yesterday - just before the announcement - with close yesterday and, if available, pre-market this morning. Here's what I found:
UUP - PowerShares Dollar Bull
2pm price 22.24
2/3 close 22.14
No trades this morning, but bid/ask is about 21.95, so likely to open lower and the dollar is weaker against most currencies.
Result - As expected, pumping up the supply of dollars is producing a weaker US$. Exactly contrary to what Sec. Geithner said he wanted a few weeks ago.
GLD - SPDR Gold Shares
2pm price 130.66
2/3 close 131.57
2/4 premarket - 134.5
Result - Using gold as a proxy for inflation expectations, the market appears to be expecting high inflation, which is one of the Fed's goals with this program.
TLT - iShares Barclays 20+ year Treasury
2pm price 102.10
2/3 close 98.92
2/4 premarket 99.43
Result - Initial response was an increase in rates, counter to what the Fed would have wanted. Part of the initial drop in price (rise in rates) is reversing in the pre-market.
AGG - iShares Barclays Aggregate Bond
2pm price 108.76
2/3 close 108.40
2/4 premarket No trades shown, bid/ask brackets the 2/3 close.
Result - Intitial response was a slight increase in rates, but this morning's follow through may or may not reverse the initial response.
BND - Vanguard Total Bond Market
2pm price 82.84
2/3 close 82.70
2/4 premarket - same as for AGG.
Result - Same as for AGG.
Disclaimer - It's dangerous to use such short term responses as a gauge, but all we've got so far is the initial response.
Officially, the Fed would probably say the level of the dollar is Treasury's responsibility, but I suspect a lower dollar is consistent with what the Fed wants to achieve and initial response indicates the dollar is under pressure.
Using gold as an inflation proxy, the market seems to be saying the Fed is achieving its goal of higher inflation.
Interest rates are more of a mixed bag. All three of the bond etfs traded down immediately following the announcement, but appear to be recovering some of that ground today. I can't even draw an initial guess on what rates will do in response to QE2. The Fed buys should put upward pressure on bond prices, but the increased inflation expectations should put downward pressure on bond prices. Not enough information to even speculate which of the two drivers wins the battle.
Note - Nothing here should be taken as commentary on whether or not QE2 was the right thing to do, only an attempt to see how the market responded to the announcement. IMHO, the Fed is taking a big risk with little chance of doing much to improve the job market.