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Market Commentary by Scott J. Brown, Ph.D., Chief Economist
Citing concerns about the pace of improvement in the labor market, the Federal Open Market Committee extended its forward guidance and started a third round of large-scale asset purchases (what most people call “QE3″). The FOMC said economic conditions are expected to warrant exceptionally low levels of the federal funds rate target through mid-2015 (vs. “late 2014″ in the previous policy statement) and added that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
The Fed’s latest bond-buying program will be in mortgage-backed securities and, unlike the first two asset purchase programs, is open-ended ($40 billion per month). In his press briefing after the FOMC meeting, Chairman Bernanke emphasized that the Fed wanted to see “substantial” improvement in the labor market, but declined to assign specific numbers to that. Bernanke also said that the Fed cannot do everything (including offsetting the negative impact of the fiscal cliff, should that occur), but is obliged to do what it can to support growth.
Retail sales were roughly in line with expectations in August, with strength centered in autos, building materials, and gasoline (weak otherwise). Industrial production slumped more than anticipated, partly due to the impact of Hurricane Isaac, but it was still a poor report excluding the weather effect. The Consumer Price Index was boosted by higher gasoline prices in August, no surprise, but measures of core inflation continued to slow (providing the Fed with more room to act).
The stock market and commodities rallied on the Fed news. However, Treasuries and the dollar weakened. Some of that was due to expectations that the new asset purchase program would include Treasuries (it didn’t). However, there was also some concern that the Fed was signaling that it would tolerate higher inflation (it didn’t). The stock market was also supported (on Wednesday) by the German Constitutional Courts approval of the European Stability Mechanism.
Next week, the calendar thins out, with a concentration of housing data. With the Fed’s emphasis on the labor market, other economic reports are likely to be weighted less in the near term. The monthly employment reports will be even more important than usual in the months ahead.
Consumer Money Rates
Treasury Yield Curve – 9/14/2012
S&P Sector Performance (YTD) – 9/14/2012
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.
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 13th, 2012.
TopicsCapacity Utilization, Consumer Price Index, Economic Data, European Debt, Federal Open Market Committee, Financial Markets, Frazier Allen, Global Equity Markets, Gross Domestic Product, Index of Leading Economic Indicators, Manufacturing Output, Raymond James, Raymond James Investment Services, Scott J. Brown, Seasonal Adjustment, Short-Term Interest Rates, Volatility, Weekly Market Snapshot
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