Barclays Capital -- U.S. Portfolio Strategy Focus: Jackson Hole Preview
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Barclays Capital -- U.S. Portfolio Strategy Focus: Jackson Hole preview - Fed unlikely to sit idly by
Barclays analyst says, "Given the reaction function of the activist Bernanke Fed, we do not expect it to sit idly by while financial conditions deteriorate. One solution is to shift the composition of the balance sheet to agency MBS from Treasuries. Purchasing assets further out the risk continuum should trigger the portfolio balance effect. A rally in mortgages should be followed by tighter credit spreads; if bank credit spreads also tightened, the equity market would likely follow suit."
"Federal Reserve Chairman Ben Bernanke did not, repeat, did not announce QE2 at Jackson Hole last August. We believe this, as do our economists. Unfortunately for the Fed, as Voltaire said, 'history is a pack of lies we play on the dead.' In other words, given that a large number of market participants believe the Chairman did announce QE2 in August 2010 (instead of in November when a formal announcement was made), he probably needs to give the markets more at Jackson Hole this Friday than he did a year ago."
"The sharp spread-widening in credit markets and equity risk premiums suggests that expectations of large-scale asset purchases restarting the portfolio balance effect are minimal. Given the poor performance of risky asset classes, we expect the chairman to explore additional stimulus measures that could offset the recent tightening of financial conditions. One solution could be to shift the composition of its portfolio from Treasuries back toward agency MBS."
Barclays analyst says, "Given the reaction function of the activist Bernanke Fed, we do not expect it to sit idly by while financial conditions deteriorate. One solution is to shift the composition of the balance sheet to agency MBS from Treasuries. Purchasing assets further out the risk continuum should trigger the portfolio balance effect. A rally in mortgages should be followed by tighter credit spreads; if bank credit spreads also tightened, the equity market would likely follow suit."
"Federal Reserve Chairman Ben Bernanke did not, repeat, did not announce QE2 at Jackson Hole last August. We believe this, as do our economists. Unfortunately for the Fed, as Voltaire said, 'history is a pack of lies we play on the dead.' In other words, given that a large number of market participants believe the Chairman did announce QE2 in August 2010 (instead of in November when a formal announcement was made), he probably needs to give the markets more at Jackson Hole this Friday than he did a year ago."
"The sharp spread-widening in credit markets and equity risk premiums suggests that expectations of large-scale asset purchases restarting the portfolio balance effect are minimal. Given the poor performance of risky asset classes, we expect the chairman to explore additional stimulus measures that could offset the recent tightening of financial conditions. One solution could be to shift the composition of its portfolio from Treasuries back toward agency MBS."
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