Diary of a Financier

QE, Inflation Expectations & SPX

In Economics on Thu 21 Mar 2013 at 21:54

In the wake of the Federal Reserve’s Open Market Committee (FOMC) meeting yesterday, I spent some time looking at the relationship between Quantitative Easing, inflation expectations, and risk assets.

A chart comparing 5y5y forward inflation TIPS breakeven & the S&P 500 (SPX) shows some interesting relationships. A correlation analysis suggest we may be in the midst of a deflationary slide analagous to that of 2010-11. Along with the correlation pattern, the divergence between 5y5y & SPX look a lot like 2010-11’s, when deflation took hold right after QE2, needing more flow (OT) to save the market:

5y5y v SPX (includes correlation & annotatations for QE announcements)

5y5y v SPX (includes correlation & annotatations for QE announcements)

If 5y5y can hold around 2.50%, then the Fed has successfully managed price levels (half of its dual mandate–employment being the other).  If 5y5y continues sliding lower, then the $85B/month flow from open-ended QE3+4 will likely be increased. I’m not drawing any conclusions from this chart–just an interesting observation.


  1. […] (TIPS breakeven) has noticeably declined, now down to 2.50661%–the brink of concern. I noticed the start of this two weeks […]

  2. […] A lot of [bearish] analysts have pointed out the 5y5y/SPX divergence.  In March, I was all over the dip in 5y5y, and it didn’t alarm […]


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