QE3 or not QE3, that is the question…

By Gareth Watson | March 30, 2012 | Last updated on March 30, 2012
6 min read

There is no doubt that comments from the Federal Reserve, and Ben Bernanke in particular, influence the markets. Often we hear such comments following Federal Open Markets Committee meetings, but a speech by Mr. Bernanke on Monday morning prior to market open had traders smiling. After concluding the week before that a third round of monetary stimulus, Quantitative Easing 3 (QE3), was dead since Bernanke made no mention of it in a speech to Congress, traders now believed such a policy could be back on the table. Specifically, traders thought his comments that the economic recovery is a “process that can be supported by continued accommodative policies” hinted that QE3 is still a distinct possibility. We believe some form of QE3 will materialize to help a struggling U.S. housing market.

If such a policy were announced, investors could see the U.S. dollar weaken again and a short term bounce in some commodity prices, which is exactly what we saw this week with precious metals. Admittedly, the bounce for gold and silver prices settled down by week’s end, but these price movements did show that if the Federal Reserve steps in again, the U.S. dollar should come under pressure.

Staying with commodities, we saw pressure on WTI crude prices this week as Iranian propaganda died down to a whisper and countries such as the United States considered releasing supplies from their strategic petroleum reserves. While WTI crude may have settled down, Brent crude prices remain high and ended up marginally lower. Even with the chatter of ended up marginally lower. Even with the chatter of that really didn’t shock the markets, the Canadian dollar ended relatively flat for the week, and will probably be influenced more by economic data in the week ahead.

Turning to corporate news, we had very few companies reporting earnings over the past five days. But without a doubt, Research in Motion was the Canadian company that attracted the most attention. Unfortunately, the earnings from RIM were not good and struggles will continue for the foreseeable future until new products are hopefully released with a new operating system at the end of the year. Even though Jim Balsillie stepped down from the Board, investors remain focused on the actual Blackberry itself and its inability to compete.


It has been a very busy couple of weeks in provincial capitals and Ottawa as budgets have been unveiled to taxpayers. Ontario residents, like in other provinces, were set up to believe that “draconian” cuts were on their way, and that life would be different for us all when budgets were revealed. However, steps taken to balance the books were not as severe as expected, resulting in some budgets being referred to as “moderate”. One could argue the same applies to the Federal Budget introduced to the House of Commons on Thursday afternoon. Our chart of the week shows the forecasted budgetary balance for Canada for the next six years. In last year’s election, the Conservatives ran on a platform of balancing the budget by 2015, and while there had been speculation over the past year that they would have to push out this timeline to a later date, yesterday’s budget shows that they still plan to balance the books by 2015, if not earlier. Our national debt is expected to be $581.3 billion by March 31, and will increase to $613.9 billion before forecasted surpluses eat into that total. Other interesting measures to note from the budget include an increase in the tax free limit Canadians can spend abroad (24 hours from $50 to $200, 48 hours from $400 to $800, and more than 7 days from $750 to $800), and the elimination of the penny as cash transactions will be rounded to the nearest nickel in the future (does not apply to electronic transactions).


Next week will be a shortened week for North American equity and fixed income markets as exchanges will close to observe Good Friday as the Easter weekend approaches. While the week may be short, we will see some significant economic data points. First, the ISM Manufacturing Index for March will be released on Monday, and economists are actually looking for monthly improvement even though other countries had disappointing Producer Manufacturing Indices last week. Second, it’s the beginning of a new month which means both Canada and the United States will reveal their monthly employment data. In Canada, economists are expecting the creation of 13,200 jobs, which is an improvement to last month’s 2,800 loss. In the United States, Consensus is calling for the creation of 210,000 jobs in March, resulting in no change to last month’s 8.3% unemployment rate. Even though jobs are being created in the U.S., the rate of creation needs to pick up substantial momentum as close to six million Americans remain unemployed from the last recession. To regain those jobs over the next two years would require a monthly print of 250,000 jobs, but many Americans would argue that the country does not have two years to wait as some job losses date back as far as early 2008.

Two weeks ago, traders believed that the Federal Reserve had taken QE3 off the table, and this week, they believed such an idea was still on the table, so who knows what next week will bring. Regardless, we believe the ongoing discussion of further monetary stimulus will continue into the weeks ahead, and before the next Federal Reserve meeting on April 25. Commodity markets will be influenced by these monetary policy expectations as they will affect the path of the U.S. dollar. Energy markets will continue to be influenced by recent warmer temperatures, continuing global economic malaise and the possibility of various national strategic petroleum reserve releases. This, in turn, could potentially put short term pressure on the loonie next week unless QE3 expectations continue to increase.


I’ve heard recently that the U.S. housing market has bottomed and is now recovering. Is that true?

We believe that to witness a sustainable recovery in the U.S. housing market you need to see two components of the market improve: (1) volume and (2) price. By volume we mean the number of homes sold needs to increase and by price we’re obviously referring to the need for real estate prices to appreciate. Recent data suggests that perhaps volumes have started to improve as we’ve seen an increase in Existing and Pending Home Sales. Housing Starts are now around 700,000 annualized off the low of 478,000 from April 2009, but still nowhere near the 2,273,000 reached in January 2006. And even though Housing Starts have increased, New Home Sales are still flat and still near the recent lows of 2010. While some areas of volume are showing improvement, we can’t say the same for price as housing prices continue to fall on a year-over-year (YOY) basis. The S&P Case-Shiller Home Price Index measures the YOY average price change in the 20 largest real estate markets in the U.S., and on Monday we saw the report for January showing that home prices had declined 3.78% YOY (compared to last January). The overall Composite Index now stands at 135.46, a level not seen since 2003. So to answer our question of the week, we believe that we have not yet seen the bottom of the U.S. housing market, and that future weakness, albeit moderate, still remains a strong possibility. To give you an idea of where average home prices stand today relative to the alleged peak back in July 2006, using the index data and assuming you owned a $1,000,000 home in July 2006, your market value today would be closer to $663,580 or a 33% decline. This decline has devastated consumer wealth levels, and in many cases has left home owners with no equity in their homes whatsoever. Since we believe housing is a concern and that the Federal Reserve will have to keep mortgage rates low in order to encourage purchasers to step forward, housing remains one of the main reasons why we still believe a further program of Quantitative Easing, or QE3, is possible before the end of June.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP

Gareth Watson