March 22, 2010
Markets Creep Higher The equity markets quietly posted gains during the course of the last week on news of muted inflation and signs that the Federal Reserve would continue holding rates at low levels for an extended period. By Friday’s closing ticker, the S&P 500 index was up 0.9% and the Dow Jones Industrial Average rose 1.1%.
There was relatively little to report following the FOMC meeting on Tuesday. The Fed elected to hold rates at a target range of 0 to 0.25% for the time being. Kansas City Fed President once again provided the only note of dissent, indicating that he was opposed to the use of the “extended period” terminology.
On Monday we learned that foreigners were less enthusiastic about purchasing US assets in January. China reduced holdings of US Treasuries by another $5.8bln for the third consecutive month. Foreigners also moved away from US corporate debt, selling $24.8bln worth of corporate bonds.
Leading indicators of economic activity are taking a decidedly weaker turn in recent weeks. The Economic Cycle Research Institute (ECRI) has been in steady decline since late 2009, but it remains at an extremely elevated level. The Leading Economic Indicators from the Conference Board are following a similar path, having risen only 0.1% in February. Negative contributions from a shorter manufacturing workweek and falling stocks prices proved to be the biggest detractors
Source: ECRI
Over the weekend we received word that the healthcare bill is on its way to becoming reality. Given the mixed opinions about the necessity of the healthcare bill it should be no surprise that the president’s approval rating is falling quickly. For the first time since being inaugurated, more people are giving President Obama a negative rather than positive rating. A Gallup daily tracking poll showed the number of individuals with a negative opinion of the President’s performance now stood at 47%, just ahead of the 46% who approve of the job he is doing.
Frustration is building due to a growing conundrum in this country. Out of the 142mln tax returns filed in 2008 a whopping 36%, or 52mln filers had no federal income tax liability. Interestingly, even a family of 4 making $50,000 can completely avoid tax liability.
Source: Investor’s Business Daily Inflation Holds Steady Despite rising concern that inflationary pressure is building, the core CPI and PPI indices were largely in line with analysts’ expectations, rising 0.1% in February.
Inflation at the consumer level has so far failed to materialize due to weakness in housing. The shelter index, which represents 33% of CPI, was flat in February after falling 0.5% in the prior month. If we look at the median CPI, a measure of inflation that excludes the most volatile components, the picture is even more benign. Median CPI posted its first monthly decline since 1982 and is now up a tepid 0.8% over the past 12 months.
Source: Federal Reserve Bank of Cleveland
So far, the Fed is doing a respectable job restraining inflation expectations with markets pricing in a 10-year inflation rate of roughly 2.25%, nearly identical to the levels experienced just prior to the crisis. This will be an important indicator to watch depending on whether the recovery gains steam or stutters into the second half of the year.
Source: Northern Trust
Producers are enduring a slightly different fate on account of volatile energy prices. Headline PPI fell 0.6% on account of a 2.9% fall in energy costs. However, over the course of the past 12 months energy is up nearly 18%.
Source: Haver Analytics
The Federal Reserve continually reiterates that substantial slack in the economy will restrain inflation for “some time.” It appears they are correct in that assessment, but investors should remain cognizant of the fact that inflationary and deflationary pressures are working in concert at the moment. A move in either direction will be an important driver of Fed policy in the coming months. The week ahead A quiet economic calendar will take a back seat to discussion about the recently passed healthcare legislation. The GDP report on Friday will be the economic report of note, but the third revision is expected to show no change based on economists projections.
Treasury auctions return to the limelight this week. Tuesday brings the auction of 2-year notes (($44bln), Wednesday is the 5-year ($42bln) and the schedule concludes with a 7-year ($32bln) auction on Thursday.
Across the pond, Alistair Darling, Chancellor of the Exchequer in the UK, will announce the annual government budget Wednesday. Darling is seeking to trim a £178bln deficit. European leaders will gather in Brussels on Thursday to discuss employment and economic growth as well as outstanding items from the climate change meetings held in Copenhagen.
lighter side
Source: Tom Toles
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