The world has been enthralled with quantitative easing 2, the Fed’s new asset purchasing program it is set to announce next week. But for Societe Generale, it’s old news, it’s priced in, and we need to know what’s next.
The big thing to watch for now: Data surprises.
Societe Generale reminds that it was negative data surprises that suggested a double-dip and inspired QE 2 in the first place.
Note how data surprises are correlated with a fall in the dollar, suggesting the likelihood of QE2 increased with bad news.
Photo: Societe Generale
From Societe Generale:
That means what will increasingly matter (once the size of QE2 is finally well priced in) is whether US data start surprising on the upside (thanks to QE2) – and how “good” as opposed to “less bad” data are perceived.
Still, nobody knows if QE2 will work or how to tell if it is working. But that debate is going to now move to the forefront and drive market movements.
From Societe Generale, emphasis ours:
The key benchmark will be whether US data start surprising on the upside, as is already expected by markets. At some stage, liquidity won’t suffice. And if US data fail to improve this would only increase the market’s focus on the QE2 efficacy debate. That outcome would be negative for growth assets, positive for USD (USD thirst effect), and cause the G10 recoupling theme to resurface (five G10 central banks have been on the dovish side lately). This is not our central scenario, but we are definitely switching from policy-watching mode to data-watching mode.
But if Bernanke’s intention with QE 2 isn’t just QE 2, but the threat of ever broader and more expansive QE if necessary, does this even matter? If Bernanke has control and doesn’t waver in his pro-easing position, bad news could just lead to more QE, and more dollar weakening.