Wealth Effect?

CashSummary

United States: Wealth effect?
United States: Durable Goods post a record increase
China: Ahead of key data we review our stance

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Good morning,

The markets love the Fed, not because they love central bankers (although they should always), but because the Fed has chosen the financial markets as the avenue to drive the wealth effect from QE. This means the markets benefit enormously from QE, but what about the rest of us? Federal Reserve officials have banked on the ‘wealth effect’ from higher stock prices and rising home values being the key way in which monetary policy boosts consumer spending and economic activity.

However, trust the sober Canadians to throw a bucket of ice-cold freezing water on this neat little contention. According to the results of a recent survey from the Royal Bank of Canada, that ethereal feeling of being richer on paper is no substitute for cold, hard cash.

When asked about what would embolden them to increase spending, nearly half of respondents noted wage increases, while about 1/5 said better job opportunities. So 65% of consumers think employment dynamics are what matter most. Contrary to popular belief, there was little “wealth effect” from stocks and housing apparent here. With the S&P 500 making all time highs and property prices holding up, asset reflation remains alive but maybe not the wealth effect. If there is no wealth effect, QE will only make the 1% richer and that’s exactly what Yellen wants to stamp out. Ironically, evidence like this brings forward not backward any rise in rates.

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Global Macro-Daily Note 27th Aug 2014

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