The Pulse: Goodbye QE2, hello QE3?

By Gareth Watson | June 6, 2011 | Last updated on June 6, 2011
4 min read

Reader Alert: Courtesy of Richardson GMP here is your look at the week ahead.

Americans had a holiday shortened week, but unfortunately their day off did little to change the tone in the markets. Disappointing economic data failed to provide any confidence to investors and continued ongoing discussion about the health of the U.S. economy and the possibility that further monetary policy actions may be required when QE2 wraps up at the end of the month.

A very disappointing ADP (private) employment report on Wednesday set the tone for the remainder of the week in the U.S. while economic statistics in other countries dampened international equity returns as it would appear that the U.S. isn’t the only economy to be facing some significant headwinds.

In Canada, the focus turned to the Bank of Nova Scotia, the last of the major banks to report its fiscal Q2 earnings. While Scotia managed to beat expectations by a few pennies as their International Banking unit remained relatively strong, the results from the banks together were mixed as wholesale businesses struggled to some extent while retail banking showed signs of moderating. If this moderation continues through the summer, we may not see material upside to bank share prices unless their wholesale business segments see some earnings acceleration.

Commodity prices were surprisingly quiet this week considering the economic news. Crude oil prices hovered around the US$100 per barrel level while gold spot prices saw a small gain. A continuation of disappointing economic prints could put pressure on commodity prices as could a rumoured move by China on interest rates this coming weekend. Gold prices have remained firm as the market debates the increasing possibility of QE3 and as Moody’s continues its threat to downgrade the U.S. AAA credit rating unless President Obama and the rest of Congress can come to a near term solution to its deficit/debt ceiling problems which will likely continue through the end of July.

While the Canadian dollar showed some signs of improvement part way through the week as the Bank of Canada indicated that interest rates would eventually go higher, the decidedly negative tone in the marketplace towards global growth prospects and thus commodity prices put the loonie under pressure yet again as our currency would eventually see little change on a week over week basis.

Economics were Ugly

This week really was all about employment and as such we feel the downturn depicted in the Non-Farm Payrolls chart was quite symbolic for the trading week as a whole. It was not only employment that brought sellers to the forefront as we also saw disappointing prints for U.S. housing, jobless claims and the ISM Manufacturing Index. In fact, the talk of economic slowdown was not confined to U.S. borders as some indicators in other countries depicted a slowing trend on a month over month basis. But the very disappointing ADP (private) employment indicator released on Wednesday truly set the tone for the rest of the week as private payrolls have basically been responsible for all job creation since QE2 (Quantitative Easing) was announced. The disappointment in the ADP print caused economists to lower their forecasts for the Non-Farm Payroll print, but those revisions were certainly not large enough with the U.S. economy only creating 54,000 jobs when the market was looking for 165,000. Not just a miss….a BIG miss.

The Trading Week Ahead

As we look forward to next week, the news flow from both an earnings and economic standpoint could be quiet as there are few material releases expected with perhaps the exception of the Canadian employment report on Friday. As such, traders may continue to focus on the larger macro/fiscal issues influencing the market. Such discussion points could include the possibility for further monetary stimulus when QE2 ends in less than a month and the ongoing budget struggle in the U.S. Congress.

However, focus will not only be on the U.S. but also on emerging markets like China where economic performance will have a material impact on commodity prices in the coming months. We have seen some statistics of late that would suggest that the economic growth in China is slowing. However, we do not want investors to automatically conclude that such data suggests a hard landing. While a hard landing is always a possibility, we still believe a soft recovery scenario for China is still very much in play.

The commodities market will naturally be paying attention to broader macroeconomic trends, but oil prices could be in focus next week as the Organization of Petroleum Exporting Countries (OPEC) will be meeting in Vienna. At this time, the organization is expected to keep its production quotas unchanged, although a cut in quotas may be possible later this year if economic growth slows and demand declines. Gold and other precious metal prices may continue to see support at current levels as the monetary and fiscal problems facing the U.S. and Europe keep some investors holding onto their bullion for now.

If commodity prices move little to start the week, investors should expect the same for the Canadian dollar, but the loonie will most likely be influenced by the employment report due out at the end of the week where it’s expected that the Canadian economy produced 25,000 jobs in the month of May.

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