LSA Connect

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.

Just as October gave us a month with equities up 10+%, November started with more negativity.  While European financial officials last week worked countless hours to find an outlet to contain and absorb losses on Greek (along with other peripheral) debt, Greek Prime Minister George Papandreou made a surprise announcement that a special referendum would be held to approve this latest bailout.

Markets were shocked, but this isn’t the first time political posturing has entered the economic process, especially during the European debt issues.  This may not turn into a deal-breaker, but yet is just another wrinkle into this soap opera.  From the prime minister’s standpoint, taking the item to the legislature rather than making a unilateral decision might be a smart move politically at home, despite the perceived uncertainty it leaves the rest of us with.  Greek politicians are very aware of the tightrope they’re walking, and are hoping to, even if cosmetically, contain some of the damage and blame while saving face in front of their own electorate.

Pessimism seems to come in twos, and it’s often interesting how one piece of data can very easily outshine another on good (or bad) days.  Today, the second negative piece was the ISM survey coming in a bit weaker from a headline level, despite its composition being fairly decent (new orders were the highest since April).  The weakness was caused by inventory drawdown and lower export orders, for the most part.