More Fed help for economy now just a matter of time

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If there was any doubt left on Wall Street about a new flood of money coming from the Federal Reserve, the lousy September employment data reported Friday should have put it to rest.

Now it’s only a matter of time -- and a matter of how much the Fed wants to try to pump into the financial system initially via ramped-up purchases of Treasury bonds and possibly other assets. That is what so-called quantitative easing, or QE, is all about.

Financial markets’ reaction to the September jobs report has been relatively muted, but the trends of the last few weeks are staying in place: Bond yields are down and stocks are up -- the Dow index closed above 11,000, at a five-month high -- while the dollar is weaker.

Commodities were the standout Friday, with a key index of raw-materials prices surging 2.7% to a two-year high. They’re benefiting from the dollar’s woes and also from a surprise cut in U.S. crop-supply forecasts.

As for QE, Bank of America Merrill Lynch economists said in a note Friday that they expected an initial Fed bond-purchase program of $500 billion over six months, beginning in November.

The launch of that program should “assure a further decline in [bond] rates,” the economists said. They predicted that the 10-year Treasury note yield would fall to 2% by year’s end. If they’re right, more record lows are coming for mortgage rates.

But there’s still a ways to go from current yield levels, and bond buyers seemed a bit cautious Friday: The 10-year T-note yield was at 2.38% at about 1 p.m. PDT, a new 21-month low but down just slightly from 2.39% on Thursday.

Some analysts aren’t convinced that QE will lead to lower bond yields. They think the market already has priced in future Fed bond purchases, with the 10-year T-note down from 2.96% just since the beginning of August.

In fact, if investors begin to expect that the avalanche of money from QE actually will find its way into the real economy, and bolster growth, longer-term interest rates should rise, not fall, said Zach Pandl, an economist at Nomura Securities in New York.

He predicted that the 10-year T-note would be back to 2.75% by year’s end -- obviously not a forecast that bond investors (or potential home buyers) want to believe.

As for stocks, the market rallied modestly but broadly Friday, with the Dow Jones industrials adding 57.90 points, or 0.5%, to finish at 11,006.48. That’s the first close above 11,000 since May 3, and it leaves the Dow up 5.6% year to date.

Equity investors clearly are putting their faith in the Fed and QE to keep the economy from getting worse.

Meanwhile, the dollar remains QE’s sacrificial lamb, because a massive flow of new dollars from the Fed would be expected to further devalue the buck. But for the moment, dollar bears look as tired as bond bulls: The DXY index of the dollar’s value against six other major currencies eased to a new nine-month low Friday, but was off less than 0.2% from Thursday.

The day’s hot action was in commodities. In part they’re continuing to gain from investors’ desire for hard assets as the dollar wilts. But it also helped that the government on Friday lowered its expectations for corn, wheat and soybean supplies.

Corn futures soared 30 cents to $5.28 a bushel, a two-year high. Wheat and soybeans also rocketed, and prices were up sharply for nearly every other major commodity.

The Reuters/Jefferies CRB index of 19 commodities jumped 2.7% to its highest since October 2008.

Gold, which sold off Thursday after hitting an all-time high of $1,346.40 an ounce on Wednesday, was back in bull mode Friday: October futures rose $10.30 to $1,344.20.

Deflation? Not in commodities lately, that’s for sure.

-- Tom Petruno