Market Commentary by Scott J. Brown, Ph.D., Chief Economist
As expected, the Federal Open Market Committee (FOMC) left the target range for the overnight lending rate unchanged at 0% to 0.25% and retained its conditional commitment to keep rates low for “an extended period.” The wording of the FOMC’s economic assessment was little changed. The committee repeated that “the pace of recovery is likely to be modest in the near term.” The big change in the statement was the admission that “measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”
In other words, the Fed views the underlying trend in inflation as too low (for those of you who remember the inflation of the 1970s, this may seem extraordinary). Recall that the Fed’s definition of “price stability” does not mean 0% inflation – rather, as former Chairman Alan Greenspan put it, “price stability exists when inflation is not a consideration in household and business decisions.“
Unlike, other central banks, the Federal Reserve does not have an inflation target. However, over the years, Fed officials have suggested a comfort range of 1% to 2% (with some more focused on 1.5% to 2.0%). Most measures of core inflation have been trending below 1%.
The question now is whether the Fed is willing to do anything about it. In its policy statement, the FOMC indicated that it is “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” However, there was nothing in the policy statement to suggest that the Fed is in any great hurry to act. Implicitly, further Fed action – an increase in outright purchases of Treasury securities or mortgage-backed securities – will depend on a more substantial deterioration in the economic outlook, which would coincide with greater downward pressure on inflation.
Next week, the economic data will have some importance for the markets, with the Institute for Supply Management (ISM) manufacturing survey results carrying the most weight. However, looking ahead, the September Employment Report (due October 8th) will have a major influence on near-term economic expectations and on the outlook for Fed policy.
Indices
| Last | Last Week | YTD return % | |
| DJIA | 10662.42 | 10594.83 | 2.25% |
| NASDAQ | 2327.08 | 2303.25 | 2.55% |
| S&P 500 | 1124.83 | 1124.66 | 0.87% |
| MSCI EAFE | 1545.07 | 1525.81 | -2.26% |
| Russell 2000 | 648.84 | 647.81 | 3.75% |
Consumer Money Rates
| Last | 1-year ago | |
| Prime Rate | 3.25 | 3.25 |
| Fed Funds | 0.25 | 0.25 |
| 30-year mortgage | 4.31 | 5.25 |
Currencies
| Last | 1-year ago | |
| Dollars per British Pound | 1.571 | 1.641 |
| Dollars per Euro | 1.336 | 1.478 |
| Japanese Yen per Dollar | 84.330 | 91.400 |
| Canadian Dollars per Dollar | 1.030 | 1.071 |
| Mexican Peso per Dollar | 12.628 | 13.340 |
Commodities
| Last | 1-year ago | |
| Crude Oil | 73.38 | 68.77 |
| Gold | 1295.28 | 1011.60 |
Bond Rates
| Last | 1-month ago | |
| 2-year treasury | 0.43 | 0.55 |
| 10-year treasury | 2.58 | 2.62 |
| 10-year municipal (TEY) | 3.92 | 3.92 |
Treasury Yield Curve – 9/24/2010
S&P Sector Performance (YTD) – 9/24/2010
Economic Calendar
| September 28th | — | S&P/C-S Home Prices (July) Consumer Confidence (September) |
| September 30th | — | Jobless Claims (week ending September 25th) Real GDP (2Q10, 3rd estimate) Chicago Purchasing Managers Index (September) |
| October 1st | — | Personal Income, Spending (August) ISM Manufacturing Index (September) Motor Vehicle Sales (September) |
| October 5th | — | ISM Non-Manufacturing Index (September) |
| October 8th | — | Employment Report (September) |
| October 11th | — | Columbus Day (bond market closed) |
| October 15th | — | Consumer Price Index (September) Retail Sales (September) |
| November 2nd/3rd | — | FOMC Meeting |
Important Disclosures
Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Investing involves risk and investors may incur a profit or a loss.
US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.
Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.
Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
Material prepared by Raymond James for use by its financial advisors.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business September 23rd, 2010.
©2010 Raymond James Financial Services, Inc. member FINRA / SIPC.
