With the Quantitative Easing Program so much in the financial news, it’s a good time to look at its pros and cons. Our first article this week is from The Economist and offers a good discussion of the program. The Federal Reserve is preparing to meet next week and will consider the issue.  Next, we continue to cover the good news about firms moving production from China back to the United States.   We follow that with some analysis from Doug Short about the trend in interest rates. He illustrates the impact of prior Federal Reserve programs to stimulate the economy and the stock market.  Finally, we have an article about the effect of rising food prices on emerging bonds.  Food prices make up a large portion of the consumer price indexes for emerging markets. It’s interesting to see how they impact yields and the demand for emerging market bonds.

QE, Or Not QE? – Although Federal Reserve Chairman, Ben Bernanke, might not be comfortable with the idea, raising the central banks inflation target to 3% might be the best way to boost the U.S. economy. We find this point of view in The Economist, with an article that explains the pros and cons of using additional Quantitative Easing (QE).  The Federal Reserve will consider the issue when it meets next week. http://www.economist.com/node/21558596

More Firms Are Moving Production From China Back To The U.S. – There’s more good news about companies moving assembly lines and production back to the United States from China.  Rising labor costs in China and cheaper U.S. energy are bringing more companies back to the States.  http://europe.chinadaily.com.cn/business/2012-07/23/content_15607088.htm

Interest Rate Update, More Historic Low Yields – This article by Doug Short features several excellent graphs that show how interest rates have trended over the last few years. He explains clearly how the stock market has responded to different actions taken by the Federal Reserve.  We are all waiting to see what the Fed may do next week when it meets on Tuesday and Wednesday.  30-year mortgage rates are now approximately 3.53% which is an all-time low. http://advisorperspectives.com/dshort/updates/Treasury-Yield-Snapshot.php

Emerging Market Food Prices Make Bond Buyers Nervous – Buyers of emerging market bonds have done well this year, but rising food prices caused by the drought are putting their future in question.  If inflation rises, the yield is reduced and the demand for those bonds sinks as well. http://in.reuters.com/article/2012/07/24/emerging-inflation-food-idINL6E8INBIA20120724

We hope you enjoy reading these articles along with us and that you find them informative.  Please forward this to your friends and family.

John R. Day and Bill W. Ennis