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Market Commentary by Scott J. Brown, Ph.D., Chief Economist
Federal Reserve officials were out in force trying to soothe market fears. A range of Fed comments had added to market uncertainty in previous weeks, but officials are now singing out of the same page of the hymnal. The message: there was no change in the Fed’s monetary policy intentions last week.
Bernanke was merely clarifying the Fed’s decision-making process. Future policy moves will remain data-dependent. If the economic data come in weaker than anticipated, any reduction in the pace of the Fed’s asset purchases would be pushed out. Tapering is not tightening.
As the Fed slows the rate of asset purchases, it would still be added accommodation. The Fed expects to hold these securities for a long time, maintaining policy accommodation. A rise in the federal funds rate target is still a long way off. Most Fed officials expect the first increase in 2015. Equities rose and bond yields declined.
The economic data were mixed. The estimate of first quarter GDP growth was revised down (to 1.8% in the 3rd estimate, vs. 2.4% in the 2nd estimate). Large revisions between the 2nd and 3rd estimates are rare. Most of the revision was in the key components: Consumer spending rose at a 2.6% pace (vs. +3.4% in the 2nd estimate) and business fixed investment rose 0.4% (vs. +2.2%).
Consumer confidence improved. The pace of new home sales increased. Home prices continued to rise. Durable goods orders reflected a further surge in aircraft, mixed but moderate gains otherwise. Personal income rose more than expected in May, with strong gains in income from assets. However, inflation-adjusted consumer spending (70% of GDP) appears to be on track for about a 1.6% annual rate in 2Q13.
Next week, the ISM manufacturing data are expected to set the tone early in the week. The markets close early on Wednesday. Nonfarm payrolls are expected to post a moderately strong gain in June. The unemployment rate is likely to edge a bit lower. Fed officials have emphasized the cumulative improvement in the unemployment rate since QE3 began, not the latest employment figures.
Consumer Money Rates
Treasury Yield Curve – 06/28/2013
S&P Sector Performance (YTD) – 06/28/2013
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 May 31st, 2013.
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