Fed’s Tricky Economic Message
Saturday, April 28, 2012
The Federal Reserve left rates unchanged while being a little more hopeful that growth would gradually pick up later. Still, the Fed stuck to its prediction that interest rates would remain very low until the end of 2014, showing very little conviction on economic improvements. However there was the slightest hint that QE3 may be available, and the market tuned to that message. Yet, the tricky side is whether the economy is weak enough to warrant additional QE, and there’s no guidance on what actually constitutes weakness — such as the “weak” GDP number — and markets will move forward trying to interpret data as it relates to the Fed’s intentions, while the revered institution doesn’t have a clue. Tricky, to say the least.
French elections unfolded as expected, although the far right did much better than projected, while the Netherlands delivered the political surprise with its government falling apart. Romania was in the same predicament, while Czechs staged a huge anti-government rally in Prague, but the government managed to win a vote of confidence. It no longer matters whether those in power are from the left or right, because austerity in lieu of flat out default is driving people insane. Standard & Poor's Ratings Services lowered Spain's long-term sovereign credit rating by two notches to BBB+ from A with a negative outlook, which drew a market yawn.
U.S. Economics: The S&P/Case-Shiller 20-city composite fell 0.8% compared to January levels to take the year-on-year drop to 3.5%, and U.S. home prices have lost a decade of price appreciation. Sales of new single-family houses in March 2012 were at a seasonally adjusted annual rate of 328,000, and 7.1% below the revised February rate of 353,000, but 7.5% above the one year ago reading of 305,000. In short, housing is still uninspiring.
The NAR index of pending home sales climbed 4.1% in March to reach the highest level since April 2010, representing a 12.8% gain from March 2011. Meanwhile, 30-year mortgage rates dropped to 3.88%, reinforcing the fact that without sub 4% rates, housing is finding it hard to move forward. Orders for long-lasting U.S. goods sank 4.2% in March, against a forecast of a 2.9% decline. Excluding the volatile transportation sector, orders declined 1.1% in March.
U.S. GDP grew at a 2.2% rate and slower than the previous 3% pace in the 4th quarter, and the sustainability of relying on savings to feed consumer spending will eventually come to a halt unless incomes increase. In addition, our Debt/GDP ratio is now above 100%. UoM consumer sentiment ticked up to 76.4 from 75.7, while the Conference Board’s consumer-confidence index fell to 69.2 in April from a revised March reading of 69, pointing to a neutral consumer with a negative bias.
Global Economics: China's manufacturing activity is still contracting, although the sector improved from the previous month, with HSBC's flash Purchasing Managers' Index rising to 49.1 in April, compared with a final reading of 48.3 in March.
Markit's German manufacturing Purchasing Managers Index (PMI) fell sharply to 46.3 from March's 48.4, well below the 50 mark which would signal growth. France’s PMI was 47.3 and contracting. Overall, the euro-zone preliminary composite PMI fell to a five-month low of 47.4 in April from 49.1 in March, defying forecasts for a rise to 49.3. The manufacturing PMI gauge dropped to a 34-month low, while the services gauge posted its lowest reading in five months.
Incoming new business fell for the ninth month in a row, registering the steepest decline since October. Manufacturing new orders fell particularly sharply, down for the eleventh month running and falling at the fastest rate since December. New business at service providers fell for the eighth successive month, showing the largest deterioration since October. New business fell at stronger rates in Germany, France and across the rest of the euro area as a whole.
The UK is back in recession led by a decline in the construction sector. Britain’s economy contracted by 0.2% in the three months through March following a 0.3% decline in the last quarter of 2011. The Bank of Japan increased the size of its asset-purchase program by about 5 trillion yen ($61.7 billion) to ¥70 trillion, but the move was not seen as enough to combat deflation — as if it makes a difference — and the yen rose instead, complicating Japan’s plans.
Market Trends: Short-term trends for major stock indices turned positive, as did long-term trends, aided by the continuation of the dollar’s negative trend and the interpretation of the Fed’s hint that the door is open to further easing. Despite the worsening economic and political European condition, the euro is positive, closing above $1.32, while keeping the long-term trend in neutral. The yen is now positive short-term and neutral long-term. Both short and long-term Oil (WTI) trends turned positive while Brent is neutral, with the spread continuing to tighten. Gold finally embraced the positive short-term trend, although long-term is still negative, and Silver continues to flounder around $31 but turning neutral short-term for the time being. Copper continues the rebound off the $3.60 and is now positive. The 10-Year Treasury rate decreased to 1.93% and Treasuries continue their positive climbs supported by an Europe that keeps on giving, a weaker U.S. economy and, of course, the Fed’s willingness to paint the town green.