Last month the Fed announced the much-anticipated third round of quantitative easing (QE3), stating it will buy $40bn of agency mortgage-backed securities every month (with no stated end-date) and will keep the fed rate close to zero out to at least mid-2015.

In addition, the ECB announced potential “unlimited” sovereign bond buying (with strict conditionality) and Germany approved the European Stability Mechanism (ESM). Japan and Australia have also stepped up their monetary easing.

The next step is for Spain to formally ask for a Europe/IMF bailout (and the conditionality it will entail) as it will permit the ECB to move ahead with direct purchases of bonds if and when necessary.

The moves have boosted risk appetite, however global growth continues to slow and a number structural problems remain unresolved.

Global growth continues to slow

Despite substantial monetary stimulus, the US jobs market and most growth data are still sluggish.

There have, however, been tentative signs of improvements in the US housing market and the US services and manufacturing ISM, with the latter rising out of contractionary territory to 51.5 in September.

US payroll figures have recently improved with NFP rising to 114K and unemployment falling to 7.8% in September, a 3 year low. However, payrolls increases consistently above 200k are necessary to have a lasting impact on unemployment.

Eurozone economic activity continues to deteriorate, with most countries in recession.

China’s economy has slowed, but with GDP growth of 7.6% in 2Q 2012, it is far from recessionary territory. China’s authorities are now reacting strongly, cutting bank reserve requirements, easing credit controls, increasing infrastructure spending and reducing interest rates.

While the growth moderation may continue in the near-term, the substantial fiscal and monetary resources available should help support growth in 2013.

The debt crisis in Europe: no easy solutions

Spain’s recession continues to deepen and its deficit continues to widen. Deteriorating regional government finances may be the factor that pushes Spain over brink and forces it to accept a bailout package.

A positive development is that recently the Spanish finance minister outlined an austerity budget that would slash spending by 8.9% and introduce a number of structural reforms that are in line with potential bailout terms outlined by the EU. This would permit the ECB to move ahead with direct purchases of Spanish sovereign bonds if and when necessary.

While policy appears to be becoming more coordinated and liquidity conditions are improving, Europe’s debt burdens remain large and the fiscal drag on growth will remain in place for the foreseeable future. This will keep the onus on the ECB to maintain a highly accommodative monetary policy.

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