I wouldn’t go so far as to say that some scale of QE3 has been “priced in”, but it is clear that the markets are now thoroughly addicted to credible promises of cheap, never-ending liquidity; or, as they would tell you in AA meetings, one sip is too much and one trillion sips are never enough. The problem for them now is that there is very little credibility left underlying the Fed’s “promises”, thanks to the complete joke of a jobs report produced by the incumbent politicians guiding the BLS.
With unemployment data suddenly showing massive improvement above expectations last month (and the non-manufacturing ISM reporting price increases across several commodities), the U.S. government has placed itself back in a position where there is simply no justification for any monetary easing. The Administration will continue to goose any and all economic data it can get its hands on going into elections, which will make it that much more difficult for the Fed to act, which, in turn, will make it very difficult for the market to keep up its appearances.