Baking in lower growth...and now beyond. Stocks have weakened going into the European close. The biggest leg down of this recent downturn began last Friday, when Q2 GDP came in well below expectations.
Much of the action this week was the market trying to grapple with the potential for 1 percent GDP growth for the full year.
Still, the data has softened up, but it has not yet indicated a recession.
But yesterday (Thursday), the market psychology seems to have changed...the market seemed to be trying to get ahead of the data and price in the likelihood of a recession.
Part of the problem is that the recovery seems completely dependent on the government...so it's all about gaming the Fed, once again.
Here, traders seem to believe they are going to be disappointed. There is a Fed meeting next week. Many traders have told me they have little confidence that the Fed will act.
Former Richmond Fed President Al Broaddus, on an interview on Bloomberg yesterday, downplayed QE3, saying it would be wise to wait, noting that trying to implement QE3 now would create "a firestorm of criticism."
Of course, there is other things the Fed could do besides outright purchases of Treasurys, including lengthening the average maturity of the bonds they hold.
The other problem, of course, is Europe. The problems are well known: 1) European banks are undercapitalized, 2) sovereign debt and bank debt needs a haircut, and 3) the EFSF is too small: maybe it can bail out Ireland and Greece, but not Italy.
The EFSF currently has $440 billion euros it can lend to Eurozone countries; the trading community has been saying that number needs to rise dramatically, perhaps to $2 trillion euros.
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