The notion that QE3 will meaningfully improve housing activity and prices by targeting the purchase of mortgage-backed securities is flawed. Since early summer, when speculation about more easing was making the rounds, mortgage-backed securities yields have declined by about 30 basis points relative to Treasuries. But longer-dated Treasury yields have risen by about 35 basis points. As a result, 30-year fixed mortgage rates have actually modestly increased over the past few months. Fixed and variable mortgage rates are already at generational lows, and mortgage spreads are already at near-record lows. The spread between agency mortgage rates and Treasury bond yields now lies at a near-record low of 1.04%, compared with a long-term average of 1.60%. As I have written extensively over the past 12 months, housing has already embarked on a durable and consistent recovery before QE3 was announced. That recovery is less a function of more easing and more a function of already-low mortgage rates (this week's 30-year fixed rate is about 3.70%), record affordability, a modest recovery in jobs growth, an improvement in household formations, the improved economics of home ownership over renting and other factors. QE3 will not have much of an effect on the real economy, but it will raise inflationary expectations. (It already has, as since June 2012, the implied inflation rate imbedded in TIPS is up by nearly 50 basis points.) Inflation is taxation without legislation. It is not market-valuation friendly.
Economic bellwether FedEx's ( FDX) announced yesterday that the company is reducing its EPS guidance for its May 2013 year from a range between $6.90 and $7.40 to a range between $6.20 and $6.60. In doing so, the company pared back its June forecast for 2013 U.S. real GDP to +1.9% from +2.4% and reduced its projections for global real GDP growth for this year and next year to +2.3% and +2.7%, respectively, from +2.4% and +3.0%, respectively. So slowing growth is seen by FedEx, but, at the same time, the company announced an increase in shipping rates to +5.9% on Jan. 7, 2013, though lowering of the fuel surcharge will reduce this to a +3.9% increase. Meanwhile, FedEx's CEO seems to agree with me that China is the canary in the coal mine. He said in the release, "The locomotive that has driven China's growth is its export industry" but the situation in Europe, as well as tepid growth in the U.S., is sapping steam from it. According to Smith, demand from Chinese consumers "is not increasing at a significant rate, contrary to everybody's hopes" and he is "somewhat amused" by observers of China who "completely underestimate" the impact of China's export slowdown. Stagflation is at our door.