Recap 8-24-12: Will more QE Matter?

NB: I made a few organizational adjustments. Readers with objections or suggestions should feel free to voice them.


The summer season and the dearth of both data and news has resulted in brokers going on ad nauseum about whether the Bernanke will ease further, either at Jackson Hole next week or at the Sept FOMC meeting. Little analysis appears to have been done on how effective such action would be. Most brokerage analysts appear to agree that extending guidance for the first hike from 2014 to 2015 will have little effect, mainly because it has essentially been priced in already. But it appears most also assume that additional QE in the form of MBS purchases will help. That assumption, however, appears quite vulnerable.

The chart below graphs the spread between the national effective mortgage rate, and the 30yr Fannie Mae Current Coupon. The spread encompasses the cost of servicing the mortgage, as well as the cost of the GSE guarantee. Homeowners pay the first interest rate, and the Fed would receive the second if they purchase newly issued MBS.

The widening spread basically tells us that further declines in the current coupon rate are having a diminishing impact on the effective rate. In other words, as servicing, regulatory, and insurance costs represent an increasing proportion of the effective rate, the marginal effect of MBS purchases on the effective mortgage rate is declining rapidly.

Furthermore, most analysts appear to assume that falling mortgage rates have a strong simulative effect on house purchasing behavior. In reality, US housing prices have just started to stabilize despite the fact that the effective mortgage rate has declined from 6.5% to 4% over the past 5 years – a decline of ~40%.

Without a doubt, additional QE will be a positive for risk assets. The risk, however, is that the positive effects are limited to sentiment, rather than economic factors.


  • US DGO jumped 4.2% MoM in July off of aircraft orders. Ex Transportation, orders droped -0.4% Mom vs +0.5% exp. Last month’s print also revised down to -2.2% vs 1.1% prev.
  • Capital Goods Orders, Nondefense, Ex Air dropped -3.4% MoM vs -0.2% exp.
  • Note that there is a strong seasonal tendency for the 1st month in a quarter to show abnormally sharp drops in orders

Upcoming Data:

  • Mon: German IFO, Dallas Fed
  • Tues: US Consumer Confidence, Richmond Fed
  • Wed: German CPI, US Pending Home Sales, South Korea PMI,