G3 Recap 9-6-11

Main Items:

  • US Non Manufacturing ISM improved to 53.3 in Aug vs an expected declined to 51 from 52.7 prev.
  • SNB intervened in EUR/CHF last night, committing to a minimum rate of 1.20.
  • Italian and French CDS hit new highs yesterday. Various people have talked about funding issues for EU banks.


  • The RBA left rates unchanged at 4.75%, as expected.
  • UK services PMI declined to 51.1 in Aug vs 54.3 exp and 55.4 prev. It was the 2nd largest monthly decline on record.
  • Swiss Inflation dropped to 0.2% YoY in Aug vs 0.3% exp and 0.5% prev.


  • The Non-Manufacturing ISM was a nice positive surprise today, but unfortunately, it is not as useful as the manufacturing version as a leading indicator. Historically, manufacturing PMI (orange line below) has lead, especially during downturns.

  • Will Operation Twist really do that much? To answer that, we have to see whether QE2 had an impact.
    The general consensus view is that QE drove the both of early 2009 and late 2010 rallies. Pundits typically point to this chart, where the total holdings of the Fed in white, and the S&P in orange:

    The general view is that correlation implies causality, and so QE must’ve been responsible for the rallies. But there are several inconsistencies in that hypothesis. In particular, the economic explanation has always been fuzzy. In fact, a chart of total QE operations vs manufacturing ISM also shows a curious correlation. And in fact, in this chart below, ISM (in orange) appears to be leading QE operations.

    Of course, this doesn’t mean that they are correlated at all. Rather, the facts appear to support the idea that it is improving data rather than QE that was responsible for the risk rallies over the past couple years.

    This conclusion is of particular import because the Fed appears ready to conduct Operation Twist, or a balance sheet neutral version of QE3 on Sept 20th. Without a coincident recovery in the data, risk assets are unlikely to rally, and it will appear as if the Fed’s ammo has stopped working.


2 thoughts on “G3 Recap 9-6-11

  1. Yeah, the question of whether it was QE or improving economy/growing EPS that lead to the rally has been pretty fun to ponder on in nice company. I even remember some quotes from these discussions: “oh, but look at the chart, the things doesn’t have any meaningful corrections, this can’t be normal!”, “well, yeah, but look at forward eps, can it move anywhere but up, up and with these?” Good times, kinda miss them:)

    Recovery in the data, actually, might be quite possible – except for the euro-woes’ ripples in world financial system, I don’t see much reason for the US not to grow in the near term.

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