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Was NFP Bad Enough for QE3?

Last updated 7/6/2012 10:46 AM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

The big news event in the US today was the release of the monthly Non-Farm Payroll report. Expectations were for NFP to come in anywhere between 90k and 100k, but printed at a disappointing 80k. The previous report’s value was revised up to 77k from 69k, but that did little to temper the sour outlook of traders. Price action afterward was mixed with the USD gaining value against most currencies, but losing value against the Yen. Metals, commodities, and Dow futures were also down on the news.

Many investors were expecting NFP to beat estimates. Given that employment figures released yesterday all beat expectations, the outlook was rather rosy. The fact that the print was just under the consensus did little to ease the disappointment. This leaves us with one major question going forward for the rest of the month: Was NFP bad enough for the Fed to introduce QE3 in August? Given that other central banks in China, UK, EU, and Australia have all recently turned dovish, it would seem to open the door for the Fed to follow suit.

There is one major issue with this assumption though. The introduction of another round of QE would be a very politically charged decision. The first round of QE was popular with Wall Street, but the average everyday American didn’t think it was such a great idea; QE2 got even more backlash spawning the Occupy Wall Street movement. Being that QE3 would be controversial as well; chances are good that President Obama would rather not have that conversation. The Catch 22 of the situation is that if QE3 is not introduced, then Obama would be viewed as not taking action when it is needed.

So we need to start looking at this debate like a political strategist instead of a market strategist. If QE3 is not introduced, Obama is lambasted by the right as being a “do nothing” president; that he didn’t prompt the Fed to take action when Americans needed it most. However, he could make the argument that unemployment is down from the 10% threshold, and that jobs are still being added, no matter how slowly. If QE3 is introduced, Obama is lambasted by the right as being an over-spender, someone who is lining the pockets of Wall Street, and increasing the debt load of the US. Protests start up again, and the effects of easing don’t have time to work their way in to the system before election time in November. QE1 and QE2 took six months and four months respectively before NFP was able to turn around and beat estimates. If QE3 follows the same trend, it will be too little too late for the Obama administration.

Considering the political factors, I do not think that today’s disappointing NFP print was bad enough for the Fed to introduce QE3; however, speculation could turn in that direction in the near term. Therefore, price action could flip in the second half of the day and risk currencies, metals, commodities, and stocks may stage a reversal and start rallying.

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.