Bernanke gave no hint of QE3

In his speech yesterday Fed Chairman Bernanke admitted that the US recovery has lost momentum, but g

(08.06.2011) In his speech yesterday Fed Chairman Bernanke admitted that the US recovery has lost momentum, but gave no hints of further monetary stimulus. Once again he discussed the insufficient progress in the labour market.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

Here in Norway, however, new figures confirmed that the job market is moving in the right direction. Later today we get another indicator from the Norwegian economy, when Norges Bank issues their Regional network.

A series of disappointing US macro figures have raised concern regarding the recovery in the world’s most important economy. And the weak non-farm payrolls report last Friday did not reassure nervous investors. Thus, some speculated that Bernanke would give hints of a possible third round of quantitative easing (QE3) in his speech yesterday. But the Fed Governor gave no such signals. Still, he admitted that the economic recovery has lost some momentum and that it is frustratingly slow.

Going forwards, however, he expects that growth will pick up, since temporary factors such as supply disruptions from Japan and higher commodity prices have weighted on activity so far this year. Once again he pin-pointed the labour market as the key to further progress. A sustained period with stronger job creation is necessary before concluding that the recovery is established, according to Bernanke. As long as this last criterion is not met, the Fed will not be in any hurry to tighten their monetary policy. The Governor does not either seems too worried regarding the rising inflation rate. 

US stock market fell after Bernankes’s lack of QE3 discussion, while the yield on longer term Treasuries fell. In FX, the US dollar weakened throughout the day yesterday, amplified by a comment by a Chinese official that China is running a major risk in holding so many dollars. EURUSD is currently traded around 1.46-1.47, as the US currency has recovered somewhat during the night.
 
Elsewhere in FX, the Norwegian krone still trades fairly stable versus the euro. The FX actors did not seemed to make particular notice of the new unemployment figures released by the Norwegian Labour and Welfare Administration yesterday. Anyhow, the May figures confirmed that the gradual improvement in the labour market continues, although it might seem like the situation is stabilizing. The number of registered unemployed decreased by almost 600 persons in seasonally adjusted terms (less than in the pervious months), while the gross unemployment fell by only 100, as the number of persons on labour market measures increased.
 
Norges Bank has already taken into account a decrease in unemployment in its forecasts, and has projected an average unemployment rate of 2¾ per cent in 2011. Still, the development has probably been somewhat stronger than the central bank expected in March (average unemployment rate for Jan-May combine is now slightly below the 2011-projection).
 
Norges Bank will issue their next Monetary Report on the 22nd of June, with new economic forecasts in addition to an updated interest path. An important input in front of that assessment is the central bank’s own Regional network, which is released later today. The quarterly survey is based on interviews of enterprises, organisations and local authorities throughout Norway, and is one of the most comprehensive indicators of the state of the Norwegian economy. We expect that the survey this time will show that the respondents have revised up their expectations of future growth compared to the last survey from January-February. Actual growth so far this year has on the contrary probably been weaker that the respondents expected at the beginning of the year.