STOCK MARKET WATCH - Thursday, 5 January 2012

[Demeter]

76. Primary Dealers See QE3 Coming

http://blogs.wsj.com/marketbeat/2012/01/04/primary-dealers-see-qe3-coming/?mod=dist_smartbrief

“Primary dealers,” those 21 lucky banks that answered the Old Bridge Troll’s questions correctly and were granted the right to do business directly with the Fed, see QE3 coming and don’t see the Fed raising rates for at least two years.

That’s according to the results of a new survey of primary dealers by the New York Fed. Primary dealers, on average, assign a 45% chance of a Fed interest-rate increase in the second quarter of 2014. Before that, the chances of a rate increase are never higher than 15%. That pretty much gibes with what the furtive fed funds futures market sees happening. The primary dealers also see a 60% chance of the Fed adding to its System Open Market Account holdings — embarking on QE3, in other words — in the next two years. That also gibes generally with what many on Wall Street seem to expect.

This is having little effect on markets — 10-year Treasury yields are at 1.99%, about where they were before the survey was released. Stocks are snoozing. Given that none of this is really unexpected, that’s not too surprising.

Update: But it is worth noting just how dire the economic forecasts of these major banks are. They see GDP growth of 2.1% and 2.5% in 2012 and 2013, respectively, and average unemployment of 8.7% and 8.3% in 2012 and 2013. They also think there’s a 25% chance of a recession in the next six months. And they see only a 30% chance, at most, of the Fed embarking on any sort of policy-tightening activity in the next two years. That includes simply moving the market on its “extended period” language for low rates.