Another quarter of a million U.S. jobs created in February – excellent news that markets are hardly celebrating. Oil fell on the news. The S&P 500 stock index is at a post-recession high, but is far from flying – up only 4 per cent since Feb. 1. Jobs may be good for investors, but money for almost nothing from central banks is better. And economic strength means that money may not be coming so freely.
Markets are addicted to cheap money and withdrawal may be painful. When Ben Bernanke, chairman of the U.S. Federal Reserve, failed even to hint at QE3 – a third round of quantitative easing – in a speech on Feb. 29 the spot gold price suffered its biggest one-day fall in three years.
No wonder. The speculation has been that QE3 would be similar in size to the $600-billion (U.S.) of QE2. These huge sums dwarf Greek GDP, not just the current €130-billion bailout. If the cash doesn't come, fans of the yellow metal would not be the only ones to suffer. No QE3 would be a challenge. Safe haven bonds, equities and oil have all recently scaled peaks.
Nor is QE3 the only stimulant that risks going missing. There's also LTRO 3. The European Central Bank's two long-term refinancing operations put a trillion euros of fresh cash into European banks. But Jens Weidmann, president of the German Bundesbank, has not been shy about expressing his discomfort with exceptional monetary support. LTRO3 is unlikely unless markets get really ugly.
Globally, markets continue to face high uncertainty. The United States, Japan and Germany are all showing signs of improving, though not high, growth. Emerging markets are growing more slowly than before, but still quite fast. Euro trouble will keep brewing. The big change and the biggest threat is that better economic news makes the liquidity tap gush less freely.
Yet trouble for markets might not be all bad. The inflated oil price threatens the recovery. If it were to fall it would help growth. What is bad for inflated markets could be good for growth and jobs. That's something the central banks need to ponder.