Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The minutes of the September 21st meeting of the Federal Open Market Committee showed some differences of opinion among Fed policymakers, but a general leaning toward further monetary policy accommodation (specifically, additional Fed purchases of long-term Treasury securities). Details of the mechanism and communications strategies had yet to be worked out. In the minutes, Fed officials pointed to the importance of real (inflation-adjusted) interest rates and the need to boost inflation expectations from current low levels (an increase in inflation expectations would reduce real short-term interest rates, boosting economic activity). Investors were looking for more details in the Fed chairman’s speech on Friday, but were disappointed by a lack of clarity. Bernanke indicated that “there appears to be a case for further action,” but he implied that that was not a done deal and was conditional on incoming economic data and a weighing of the potential costs and benefits. Still, with the Fed expecting both growth and inflation to trend too low for the foreseeable future, further accommodation seems more likely than not.
The economic data was mixed. Retail sales rose more than expected in September and figures for August were revised higher. Inventories advanced more than anticipated in August, and some of that accumulation was likely unintended (the result of softer-than-expected demand). The retail sales and inventory data imply an upward revision to economists’ estimates of 3Q10 GDP growth. The Consumer Price Index rose just 0.1%, while the core rate (which excludes the food and energy components) was unchanged (up 0.8% y/y – further below the Fed’s comfort range).
Next week, the markets could react to any surprises in the industrial production and residential construction data, but the focus is a couple of weeks ahead (to the November 2 mid-term elections and the November 3 Fed policy decision). The mortgage foreclosure crisis hasn’t received much attention from the markets – the direct economic impact may be limited (construction activity is already depressed), but there could be some financial sector disruptions in the weeks ahead.
|Last||Last Week||YTD return %|
Consumer Money Rates
|Dollars per British Pound||1.598||1.597|
|Dollars per Euro||1.405||1.490|
|Japanese Yen per Dollar||81.450||89.390|
|Canadian Dollars per Dollar||1.005||1.028|
|Mexican Peso per Dollar||12.432||13.093|
|10-year municipal (TEY)||3.98||3.78|
Treasury Yield Curve – 10/15th/2010
S&P Sector Performance (YTD) – 10/15th/2010
|October 18th||—||Industrial Production (September)
Homebuilder Sentiment (October)
|October 19th||—||Building Permits, Housing Starts (September)|
|October 20th||—||Fed Beige Book|
|October 21st||—||Jobless Claims (week ending October 16th)
Philadelphia Fed Index (October)
Leading Economic Indicators (October)
|October 25th||—||Existing Home Sales (September)|
|October 26th||—||Consumer Confidence (October)|
|October 27th||—||Durable Goods Orders (September)
New Home Sales (September)
|October 29th||—||Real GDP (3Q10, Advance estimate)|
|November 2nd||—||Election Day|
|November 2nd/3rd||—||FOMC Meeting|
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.
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 October 14th, 2010.