That's because it's looking increasingly likely that the leading central banks will launch quantitative easing (QE) or monetary easing programmes in the weeks ahead. In the UK, a sharp drop in consumer prices inflation to below 3 per cent and, at 2.8 per cent, its lowest level for two and a half years, opens the door for the Bank of England to launch another round of QE either at the monetary policy committee (MPC) meeting on 5 July or, a month later, on 1 August. Governor Mervyn King is clearly receptive, noting "the case for further monetary easing is growing", and minutes from the June MPC meeting reveal that he voted for a further £50bn programme of QE. Moreover, the Bank's Quarterly Bulletin highlighted the success of previous QE programmes which "accounted for around half of the reduction in gilt yields". Sharp falls in Brent Crude and weak pay settlement data narrow the odds even further.
It's also a real possibility that the European Stability Mechanism (ESM) could be granted a banking licence by European Union leaders, which would enable the eurozone rescue fund, expected to be established in July, to borrow directly from the European Central Bank. True, this would require Germany to play ball, but there is a compelling case to be made, as it would enable the ESM to blitz the European debt markets and drive down secondary market yields without having to raise capital directly through the bond markets. Any moves in this direction could have a dramatic impact on investor sentiment.
There is a real chance, too, that the US Federal Reserve will turn on the printing presses again. Taking into account factors such as weak growth in consumption and income, a drop-off in new orders and industrial production, an acceleration of negative surprises on short-leading indicators such as Fed surveys, and softness in short-lagging data such as new unemployment claims, US fund manager John Hussman believes: "The US has also now entered a recession in the business cycle".
Interestingly, Mr Hussman points out that repeated monetary interventions of the last couple of years have been an attempt to contain "the unfinished effect of the 2008-09 downturn", as the global economy deleverages. However, since debt burdens were never restructured, economies struggled to sustain any pick-up of demand. Indeed, apart from "short-lived bursts of economic activity driven by QE, important leading economic indicators have remained close to territory traditionally associated with recessions". Any hint of QE3 at the Federal Reserve's next meeting on 1 August will determine the path of markets for the remainder of the year.
