Markets spent last week ‘waiting for the Fed’. The high-frequency traders desperately need more cheap money, if they are to continue driving commodity and stock prices higher. And on Friday afternoon, they believed they got their wish.
Brent crude oil prices jumped $1.92/bbl, and WTI $1.85/bbl.
As the chart shows, the Fed’s 3 previous efforts (QE1, QE2, Operation Twist) all produced major rallies in oil markets. And these higher prices had to be passed on in higher chemical prices, thus damaging end-user demand. Now, markets are anticipating QE3, and further oil price hikes.
The scale of the Fed’s stimulus is immense. QE1, QE2 and Twist have so far cost $2.3tn, equal to the size of the UK economy – the 7th largest in the world. The aim has been, as the Wall Street Journal notes:
“To drive down long-term interest rates, push up stocks and other asset values and soften the value of the dollar. They thereby boost spending, investment and exports.”
But the link between higher stock prices and increased demand seems wishful thinking, not reality. And some senior economists are clearly now worried, with Harvard’s Martin Feldstein warning, “The Fed is at a point where another round of quantitative easing would be a mistake.”
The Fed itself also seems on the defensive about the value of its actions. As the New York Times notes, back in 2010 (when QE2 launched):
“Mr. Bernanke devoted most of his remarks to establishing the need for action, largely taking for granted that the Fed had the power to improve the economy. (But) on Friday, it was the need for action that Mr. Bernanke took for granted. The question now is how much more the Fed can do.”
This time may be different. Perhaps today’s high oil prices will not lead to recession, as they always have in the past. But by providing the cash to drive prices still higher, it seems likely that the Fed is making the task of economic recovery more difficult, not less.
Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 22%. “PTA supply had been tightened recently following powerful typhoons that hit China’s east coastal areas”
HDPE USA export, down 20%. “Traders said there was virtually no material being offered”
Naphtha Europe down 11%. “Market remains weak, with high prices continuing to raise concerns of already-lacklustre demand being damaged further. A cargo from Vitino, Russia, has already been held for ten days on demurrage”
Brent crude oil down 10%
Benzene NWE down 1%. “Market was largely rangebound this week”
S&P 500 Index up 3%