After the 1 hr QE4 rally…

While yesterday’s QE4 announcement was widely expected, the actual post news rally lasted just one hour. Attention immediately shifts back to DC with discussions likely continuing past the scheduled recess of next Friday. The combination of more Fed action and what I see will be inevitably contractionary fiscal policy in 2013 on top of a lackluster economy, stagflation is the only scenario that makes sense to me and I repeat my belief that we must buy the flation (gold/energy/ag) and sell the stag (consumer related and any business without pricing power). I also think you can stick a fork in long term US Treasuries as its been almost 5 mo’s now that the 10 yr yield in particular saw its low yield, notwithstanding the Fed’s best attempts to squash them further. Even in the MBS market, as of yesterday’s close, the 30 yr FNMA coupon is down all of 16 bps since QE3 began.

The only equity market that is responding with substance to the likelihood of more QE is the Nikkei as it rallied another 1.7% overnight as the yen is now approaching a 9 month low vs the US$. The PM election is Sunday. Both South Korea and the Philippines left rates unchanged as expected.

In Europe, Greece finally got approval for its long awaited bailout money with the inevitable writedown of public sector bond holdings though still in front of them in the next yr or 2. Italian and Spanish bond yields are lower for a 3rd day as both countries sold both short and long term debt. In the US, we’ll see how much the hurricane impacted retail sales in the important holiday season and whether the Q3 GDP inventory related boost takes a breather in Q4.

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