At his blog, Next New Deal, Mike Konczal asks a fabulous question about the Federal Reserve’s quantitative easing program: did the central bank do it backwards?
Remember, the Federal Reserve also did QE with mortgage-backed securities, buying $40 billion a month in order to bring down the mortgage rate. But what if it just set the mortgage rate? That’s what Joseph Gagnon of the Peterson Institute (who also helped execute the first QE), argued for in September 2012, when he wrote, “the Fed should promise to hold the prime mortgage rate below 3 percent for at least 12 months. It can do this by unlimited purchases of agency mortgage-backed securities.” (He reiterated that argument to me in 2013.) Set the price, and then commit to unlimited purchases. That’s good advice, and we could have done it with Treasuries as well…
Policy used to be conducted this way. Providing evidence that there’s been a great loss of knowledge in macroeconomics, JW Mason recently wrote up this great 1955 article by Alvin Hansen (of secular stagnation fame), in which Hansen takes it for granted that economists believe intervention along the entirety of the rate structure is appropriate action.
He even finds Keynes arguing along these lines in The General Theory: “Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.”
On the homefront
TSX 60 futures are soaring ahead of the open.
The loonie is up modestly to trade at 0.894 against the greenback.
Gold is the new oil, and that’s no compliment. The TSX has suffered two sizeable losses in its previous two sessions, driven in large part by a massive decline in the gold mining space. The underlying commodity has taken it on the chin since the Federal Reserve announced the end of its bond-buying program, and another central bank action overnight caused the shiny metal to extend its losses. Goldcorp (G), Yamana Gold (YRI), and Agnico Eagle (AEM) all fell more than 10 percent on Thursday amidst disappointing earnings, and a solid report from Barrick Gold (ABX) didn’t render it immune from the sell-off in the space, as it closed down 4.1 percent on Thursday. There’s no relief in sight; judging by the underlying commodity, there’s a high probability that things will get worse for these stocks today.
Did Canada’s streak of economic growth end in August? At 8:30am (EDT), Statistics Canada will release the GDP report for August. Economic growth flatlined in July, up just 0.04 percent month-over-month, and the consensus estimate is that growth will continue to stall. The danger, however, is that the economy will contract, given the large trade deficit and precipitous drop-off in manufacturing sales seen over the course of the month. “GDP for August could be on the soft side as almost all of the relevant economic data were weak,” wrote Scotiabank’s economics team, which is calling for growth to decline by 0.3 percent month-over-month. Such a print would snap the Canadian economy’s seven-month winning streak.
UPDATE: The Canadian economy contracted in August for the first time this year, thanks in large part to a decline in natural resource extraction.
Income-splitting announced and debated. In Vaughn, Ontario, Prime Minister Stephen Harper unveiled a modified form of income-splitting, which enables one higher-earning parent to transfer income to another to reduce the household’s tax burden for a maximum benefit of $2,000 per year. In Maclean’s, Jennifer Robson casts a critical eye on the proposal, which, it should be noted, only helps families with children under the age of 18. The Carleton professor of public policy argues that it will do nothing to aid the median two-parent family with kids in which only one spouse works, and that it places a rather low value on unpaid work done by the other spouse. Jack Mintz, on the other hand, is much more sympathetic towards the proposal, noting that it is largely in line with the famous Carter Report.
Rogers and Vice partner up. Rogers (RCI.B) is joining forces with Vice Media to launch a 24-hour TV channel geared towards at millennials, a $100-million joint venture to produce Canadian-centric content . “VICE was the obvious choice to partner with. They started in Canada but then moved to New York to prove they could build a global media company, which they’ve done,” said Rogers CEO Guy Laurence. “However, they’ve never forgotten their Canadian roots and have always wanted to open a Canadian production studio.”
A successful debut. Seven Generations Energy (VII), the oil and (primarily) natural gas producer, rose 16.7 percent during its first session on Bay Street. The offering was priced at $18 per share, and the over-allotment option was exercised; in total, $932-million in shares were sold.
If you were missing QE, don’t worry – the Bank of Japan has you covered. In a surprise move, Kuroda & Co announced that the central bank raised how much it plans to expand the monetary base by roughly 20 percent, to a whopping ¥80 trillion. As you’d anticipate, the yen plummeted and the Nikkei spiked – but the move had implications for other asset classes, as Business Insider’s Mike Bird notes. Gold got hammered on this news, falling to 1,270 USD/oz, its lowest level since 2010.
Japan also had a heavy slate of economic data come out overnight. Core CPI rose 3 percent year-over-year, though that’s still artificially elevated due to the sales tax hike in April. On a more sour note, household spending declined by 5.6 percent year-over-year in September, worse than economists’ call for a 4.3 percent decrease, and housing starts fell by double digits. “The next point of focus will be what happens with the second leg of the sales tax hike, which Shinzo Abe is meant to decide on very soon,” writes IG market strategist Stan Shamu.
Russia’s central bank hiked its policy rate by 150 basis points to 9.5 percent in an attempt to temper inflation even as economic growth is seen to be stagnant, at best. The move provided little support for the Russian ruble, which unexpectedly appreciated by a large amount relative to the greenback early on Thursday.
Some disappointing data out of Europe: German retail sales suffered their worst one-month drop-off since May 2008 in September, tumbling 3.2 percent. Meanwhile, French consumer spending fell 0.8 percent month-over-month. Oh, and inflation? It’s still missing in action. Headline inflation in the euro zone is up 0.4 percent year-over-year in the initial estimate for October, while core inflation rose 0.7 percent, a tick less than expected.
Two pieces of important American data on deck: the PCE index, the Federal Reserve’s preferred gauge of inflation, is due out at 8:30am (EDT), while the final reading of the UofM consumer sentiment index is slated to be released just before 10:00am.