LSA Connect

It was a fairly light week, as far as economic data was concerned.

Existing home sales increased in January by +4.3% to 4.57 million units, which was higher than forecast but was somewhat tempered by some adjustments to the December level, which muted the effect.  The median sales price of existing homes was unchanged (based on seasonal adjustments) and the year-over-year change was still negative at -2%.  The ‘months supply’ of homes has declined to the lowest level since spring 2006, at around 6.1 months.  This may be from a decrease in listings than a strong improvement in sales, however.

New home sales fell in January by -0.9% to a seasonally-adjusted rate of 321,000 after four straight months of gains.  This was somewhat tempered by upward revisions in the fourth quarter of last year.  Interestingly, in 2011, only 304,000 new homes were sold—the fewest on record since data began in 1963.  We’ve mentioned this before, but this level is far below that needed to keep up with replacements and demographic needs (think 3 times the current amount).  It seems to be more a matter of how long we trail along at this lower level.

Initial Jobless Claims were flat on the Feb. 18 week at 351,000, but the more relevant four-week moving average fell further to 359,000 (the lowest it’s been since March 2008).  While some disputed the initial stickiness of the numbers early on as well the magnitude of normal labor force size adjustments, the labor market continues to improve on many levels.  Continuing claims fell to 3.392 million (a drop of 52,000).

It may be a bit early to read too much into this, but there has been a historical precedent of upward pressure on rates and increased tendency toward monetary tightening when initial claims levels begin to fall below 350,000 consistently.  Right now, we’re right about the breakeven point, so stay tuned.  But, if this improvement continues—even at a moderate pace—the ‘2014’ target for Fed action may need to occur sooner, barring other factors.

The Federal Reserve decided to leave their target rate unchanged at 0.00-0.25% at the conclusion of today’s meeting.  This was no surprise, nor was their continued use of the language pertaining to their policy of “exceptionally low interest rates at least through mid-2013.”  The statement noted “some improvement” in labor market conditions and the economy overall was “expanding moderately.”  Inflation was also noted as having moderated, versus the “appearance” of moderation last month. 

The FOMC continues to provide a cautious tone in their growth outlook for the near-term, however, particularly in reference to slowing global growth.  Due to stress in global financial markets (Europe), they reiterated their risks of “significant downside risks to the economic outlook.” Continue reading →

Economic Notes

European concerns continued to dominate other issues.  This is unfortunate, considering that U.S. news has been looking better as of late and is perhaps underappreciated.  Japan, which has also been largely ignored, grew for the first time in four quarters.

The European Central Bank purchased €10 Billion to purchase Italian and Spanish Bonds in order to bring yields in both of those nations back below 7.0%—the often-referred-to “breaking point.”  In response to criticism he could be doing more, ECB President Mario Draghi maintained that ‘price stability’ should remain the institution’s primary objective and doing otherwise might threaten its credibility (note that many central banks, including the ECB, are subject to only a single mandate, as opposed to the Federal Reserve’s dual mandate of stable prices and maximum employment).  Of course, with such a broad mandate, a wide variety of actions could be justifiable. Continue reading →

The Federal Reserve decided to hold steady again today, with target rates at 0.00 to 0.25%, which was largely expected.  They reiterated their expectation of keeping rates at these lower levels for the same “extended” period (mid-2013 at this point), as well as continuing the extension of overall average maturities in the portfolio (aka “Operation Twist,” announced in Sept.).

On a positive note, the committee acknowledged that economic growth had “strengthened somewhat” in the third quarter, as household and business spending has increased “at a faster pace” in recent months in contrast to prior comments and data from earlier in the year.  On the more tempered side, investment related to housing remains depressed and the employment environment remains weak.  The FOMC continues to expect moderate economic growth over coming quarters, but also acknowledges that “global financial markets” remain a concern on the downside.  This language was unchanged from prior meetings.

Much of the commentary is what we expected.  We anticipate that as the European situation resolves itself, risks to recession emanating from that crisis should abate, and could add to more of an overall positive tone from the FOMC as that “wildcard” is removed.  As it stands, domestic data has improved from prior meetings, which is in line with numbers we’ve seen.