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Ed Yardeni, chief investment strategist at Yardeni Research, gets to another reason why stock markets might be turning a tad volatile after a lengthy pre-QE2 run-up: Economic news is good.

The Federal Reserve's decision to launch another quantitative easing program - dubbed QE2 - sprouted from disappointing economic data, including stubbornly high unemployment. Last month, though, U.S. employers added far more jobs than economists had been expecting. And on Wednesday, the Labor Department reported that weekly jobless claims fell to a four-month low, suggesting again that things might not be so bad.

Meanwhile, QE2 has triggered quite a backlash, and not just among individual critics and right-wing Presidential hopefuls who believe that the bond-buying won't succeed in driving down borrowing costs and unemployment. Germany has lashed out at the Fed, and China seems none too pleased, either.

Add it up, and there is a possibility that the Fed could be forced to scale back its initial $600-billion (U.S.) plan.

"While everyone I speak to is sick and tired of the QE-2.0 debate and mostly side with the opposition, the new concern is that stock prices might correct if the Fed is forced to scale it back," Mr. Yardeni said in a note.

"This could happen as a result of stronger-than-expected employment gains in coming months. More predictable is that there will be more opposition to QE-2.0 come January when three non-voting dissidents on the [Federal Open Market Committee]get to vote. There is also a growing global backlash from other G-20 nations. My sense is that investors don't like QE-2.0, but they like what it seems to be doing to stock prices, i.e., pushing them higher."

 

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