An Early End to QE2?
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China raised its one-year lending rate a quarter point to 6.06% last night as part of its ongoing campaign to fight inflation. It also raised the interest rate on savings deposits to 3% in an attempt to keep cash on the sidelines.
Consumer prices may have risen as much as 5.3% in January, according to Bloomberg.
China has now raised interest rates by 0.75 basis points. But it’s clear that the moves so far, which include raising loan reserve requirements for banks, has had little effect on prices in China. India, for instance, has hiked rates by 1.75 basis points.
There should be little doubt that more rate hikes are on the way in China. And we should see China let the yuan increase in value at some point, too. Most of China’s attempts to control inflation are focused on domestic demand. Yuan revaluation, however, would serve to slow foreign investment in the country, and slow its export economy by making its goods relatively more expensive.
It’s easy to see why China is loathe to revalue the yuan and put the brakes on exports. It’s also easy to see that interest rates alone will have a limited effect on prices.
*****Further monetary tightening from China will affect commodity prices on both the perception and the reality that China’s demand will lessen. I would expect oil to bear the brunt of any China-related commodity weakness.
Developments in Egypt will also continue to move oil prices. But that’s more of a wild card, as pressure could be to the upside as well as downside, depending on how the political situation plays out.
Oil and energy are among the weakest sectors in the early going today.
On a seasonal basis, oil prices have a tendency to top in late winter, so we may see an extended period of weakness for oil prices and oil stocks. Oil tends to make a secondary high in early summer, so patience is warranted for any new oil/energy positions.
*****Richmond Fed president Lacker is out today saying he expects GDP growth to approach 4% this year, and as a result of stronger than expected growth, the Fed must re-evaluate its QE2 policy.
I am very curious to see how investors will react to the possibility that QE2 may be ending. The policy is set to conclude in June, anyway. And I would suspect that the Fed will continue until then, regardless of growth.
QE2 is credited as an important catalyst for the stock market since late August. One would assume that the removal of QE2 would be a negative. But much will depend on what’s happening with employment when monetary policy changes. If employment numbers are showing real improvement, the end of QE2 could even be seen as a good thing.
*****I’m starting to get the feeling that we may see another bearish turn in the news flow. We saw one at the start of earnings season, and it resulted in a brief period of weakness for stocks. Of course, that weakness was quickly overcome by the bulls.
But as earnings season starts to wind down, don’t be surprised to see the bearish rhetoric pick up. After all, there are plenty of negative catalysts out there: inflation in emerging markets, the end of QE2, weakness in commodity prices and fiscal spending cuts from Congress.
It’s very likely that the looming debate about the Federal government’s debt ceiling and Congress’ desire for spending cuts will get ugly. And let’s face it: the economy and the stock market have been driven by government and Fed spending.
It may seem counter-intuitive that moving to address our national debt and get our fiscal house in order would be bad news. But that will affect corporate profits, and therefore, stock valuations.
*****A reader wanted more information on my comments about Intel yesterday:
Based on your black eye peas report, it sounds as if Intel is pretty desperate, but at the end you say they put up some good numbers... so bottom line how would you trade Intel now? Or would you instead trade the Qualcom NVDA stocks ?? Thanks…
As I’ve written, there is a virtuous cycle going on in the semiconductor space. The boom in handheld wireless devices like smartphones and tablets is driving a surge in chip development. That means semiconductor companies are buying new equipment and hiring employees. It means wireless carriers are seeing revenues from data plans surge which will mean more hiring and investment in their networks. Data and bandwidth management companies are benefitting. And so are the retailers like Apple.
Nvidia (Nasdaq:NVDA) makes graphics processors which are in high demand for graphic-rich handheld devices. But Nvidia is also integrating its graphics processors with regular data processors to offer device makers a streamlined solution.
Nvidia’s current valuation reflects high expectations for sales in the future. The stock could be very vulnerable if those expectations aren’t met, and likely exceeded. I’d feel a lot better about Nvidia around $20-$22 a share.
Qualcomm (Nasdaq:QCOM) may be more stable due to its revenue from CDMA licensing. There’s likely less downside risk than Nvidia.
That brings us to Intel (Nasdaq:INTC). While Intel may be missing out on the handheld device boom right now, it’s only one acquisition away from being right in the thick of things. And with $21 billion in cash, it can make that acquisition easily. Intel is also buying back stock, and has increased its dividend.
Intel barely budged after its most recent earnings report, despite beating estimates and guiding higher. The company currently trades with a forward P/E below 10. It’s cheap, no doubt.
At the same time, investors are skeptical of Intel, and that could keep it cheap for a little while. I can imagine there will be an opportunity to get Intel around $20 in the next month or so. That would be a very good buy, in my opinion.
