Bloomberg (13/5/2011): Investors say U.S. stocks and Treasuries will decline and the dollar will strengthen after the Federal Reserve completes a $600 billion stimulus program in June, a Bloomberg poll found.
Fifty-four percent of respondents say the 10-year Treasury yield will climb, while pluralities of 43 percent see the Standard & Poor’s 500 Index falling and the U.S. Dollar Index gaining, according to a quarterly global poll of 1,263 Bloomberg customers who are investors, traders or analysts conducted May 9-10. The proportion of respondents saying the Fed’s bond purchases are reducing unemployment and boosting growth rose to 35 percent from 27 percent in January’s poll.
The results highlight the divergence of views provoked by Fed Chairman Ben S. Bernanke’s record monetary stimulus. While respondents say Bernanke’s crisis-management compares favorably with other central bankers, a majority say U.S. monetary policy is now too loose. About one third say the bond purchases, dubbed QE2 for the second round of so-called quantitative easing, risk runaway inflation, and another quarter say they aren’t helping the economy enough.
“The recent rally in stocks is a direct result of QE2,” said Joseph Russo, 43, managing director and co-head of capital markets at RAIT Securities in New York, who took part in the survey. “As the stimulus money is removed from the system, the result will be lower stocks worldwide and an international flight to quality.”
Dollar Index
Asked how financial markets will react when the Fed completes its purchases of Treasuries, 26 percent said 10-year yields will stay the same, and 17 percent said they will fall. Seventeen percent said the S&P index would gain, and 37 percent said it would stay the same. The U.S. Dollar Index is forecast to be unchanged by 26 percent, while another 26 percent foresee a drop.
Since the Fed approved the unprecedented $600 billion bond- buying program in November, yields on 10-year Treasuries have increased to 3.23 percent from 2.57 percent. The S&P 500 has gained 13 percent, while the dollar has weakened 1.7 percent against a basket of six currencies.
The U.S. unemployment rate dropped to 9 percent last month from 9.8 percent in November, and payroll growth topped 200,000 for three straight months for the first time in five years. Surging food and fuel prices boosted the year-on-year inflation rate to 2.7 percent on March, an increase Bernanke says will be temporary.
Dangerous Levels
A smaller portion of investors is skeptical of the bond- buying program than in January. Twenty-four percent say the plan isn’t having a major effect on the economy, compared with 35 percent in the prior poll. The number of respondents saying the purchases risk stoking inflation to dangerous levels was little changed at 35 percent.
At the same time, 64 percent of respondents said they had a favorable view of Bernanke, compared with 31 percent unfavorable, about the same as in the prior poll. U.S. Treasury Secretary Timothy F. Geithner’s favorable rating fell to 44 percent from 52 percent; 46 percent had an unfavorable view, up from 39 percent in January.
Forty-two percent said Bernanke did the best job among four major central bankers in addressing their own economic crisis, more than double the 20 percent for European Central Bank President Jean-Claude Trichet and 18 percent for Bank of England Governor Mervyn King. Nine percent named Bank of Japan Governor Masaaki Shirakawa.
Deflation Risk
Bernanke, 57, signaled in August that the Fed was considering a second round of asset purchases after buying $1.7 trillion of mortgage debt and Treasuries from December 2008 through March 2010. At the time, inflation was slowing to the point that Fed officials were concerned it might get too low or possibly turn into deflation that could be harmful to the economy.
The additional bond buying “reversed a disinflationary trend in prices which could have resulted in an even larger problem than we now face,” said respondent Craig Dismuke, 37, chief economic strategist at Vining Sparks IBG, a broker-dealer based in Memphis, Tennessee.
“Now that deflation is off the table, there is a new battle looming -- that inflation is, in fact, not transitory -- and my hope is that they address it with equally appropriate vigor,” Dismuke said. “If not, my view will change.”
ECB Policy
Asked about the policies of major central banks, 55 percent said the Fed is too loose, 38 percent said its policy is appropriate, and 6 percent said it’s too tight. That compares with 19 percent who said the ECB policy is too loose; 44 percent appropriate and 33 percent too tight. The ECB raised its benchmark rate by a quarter percentage point in April to 1.25 percent, and traders predict a further rise this year.
Fifty-seven percent of respondents said Bernanke’s first press conference on April 27 made no difference in the Fed’s standing with investors, while 24 percent said it improved the Fed’s standing. Nine percent said it hurt the Fed.
On the Fed’s transparency, 54 percent said the amount of information provided by the central bank is about right, while 29 percent said it’s insufficient and 12 percent said it’s more than sufficient.
“More Fed transparency is always a positive,” and it has improved since Alan Greenspan’s tenure as chairman ended in 2006, said Garst Reese, 40, investment counselor at Boys Arnold & Co. in Asheville, North Carolina. The central bank “has disclosed information more quickly than at any time before,” Reese said.
The quarterly Bloomberg Global Poll of investors, traders and analysts was conducted by Selzer & Co., a Des Moines, Iowa- based firm. It has a margin of error of plus or minus 2.8 percentage points.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
