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In his semi-annual testimony to Congress, Federal Reserve Chairman Bernanke reiterated the pledge to keep interest rates “exceptionally low for an extended period” as the “nascent economic recovery” needs continued support. However, this outlook has not kept the Fed from normalizing its lending activities. Several of the lending and liquidity facilities enacted in late 2008 were shut down at the beginning of February and on February 18th they raised the discount rate, where banks can borrow directly from the Fed on an emergency basis, to 0.75%. The Fed was quick to point out that this was not a tightening of monetary policy, rather it should be seen as a normalization of policy; a preamble to the actual tightening cycle. Overall, economic data released in February were mixed as housing activity softened, the labor market saw another month of job losses coupled with a decline in the unemployment rate, while retail sales climbed more than economists’ expected. Also on the positive side, manufacturing continued to expand.
Residential Housing January housing data indicate a paradox of supply and demand. On the supply side, housing starts climbed 2.8% in January and while building permits dropped 4.9%, the decline was a moderation of December’s 10.9% surge. On the demand side, new home sales plummeted 11.2% to the lowest level on record. The median new home price dropped 2.4% to $203,500 year-over-year, while home purchases were down 6.1% in the same period. Existing home sales sank by 7.2% in January following December’s record breaking 16.2% decline while home prices were unchanged from January 2009. The S&P/Case-Shiller national home price index, which is considered a more accurate gauge of home prices, showed prices declined 2.5% in the fourth quarter of 2009 from the year earlier period. Spending Fourth quarter GDP was revised higher to 5.9%, an increase of 0.2% from the January estimate. A substantial increase in domestic investments – primarily due to higher inventories – caused the upward revision. Personal spending was revised down as was state and local government spending. The Conference Board’s consumer confidence reading plunged more than 10 points to 46 in February, an unexpected, and unusually large, decline. The current expectations index fell to a 27-year low as equity markets dropped, concerns over continued job losses lingered and nasty weather dominated the Eastern US seaboard. In contrast, the University of Michigan’s February gauge of consumer sentiment dipped slightly to 73.6 from January’s 74.4. U.S. retail sales climbed 0.5% in January after a 0.1% decline in December, while consumer credit contracted for the eleventh straight month in December and declined a cumulative $102.3 billion, or 4%, for all of 2009. On the business side, recent data continue to indicate stabilization and growth in business spending and the manufacturing sector. The ISM Manufacturing index grew for the sixth consecutive month in January, rising to 58.4 from a reading of 54.9 in December. January’s increase was the largest monthly increase in more than 5 years. The Chicago Purchasing Managers Index also remained in expansion mode by climbing to 62.6 in February, the highest level since April 2005. Durable goods orders gained in January, increasing 3% while orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell by 2.9%. Shipments of such goods, a tally used in the calculation of GDP, declined 1.5% last month after climbing 2.4% in December. Finally, the U.S. trade deficit widened by 10.4% in December. Imports increased 8.4% while exports only climbed at a 3.3% pace. Labor Market While job losses appear to be easing, the January employment report showed the labor market is still contracting. The January unemployment rate declined 0.3% to 9.7% as non-farm payrolls dropped by 20,000 compared to the consensus estimate of a gain of 15,000. This report also highlighted the US Labor Department’s annual revisions, showing an additional 1.2 million jobs have been lost since the recession began in December 2007, bringing the total to 8.3 million. Initial jobless claims, a leading indicator of the labor market, showed signs of unsteadiness as claims rose to 496,000 for the week ending February 20th. The four-week moving average of initial claims rose to 473,750. Inflation Overall price pressures remain contained, giving the Federal Reserve discretion to fine tune monetary policy at its own pace. The consumer price index rose 0.2% in January, while core prices, which exclude volatile food and energy prices, declined 0.1% - the first monthly decline in 28 years. In the same period, the producer price index increased 1.4% and core prices rose 0.3%. Compared to a year earlier, core consumer prices are up 1.6% while core wholesale prices have risen 1.0%. The next FOMC meeting is scheduled for March 16th and in light of moderate economic improvements and subdued inflation readings, market participants expect the FOMC to maintain the “exceptionally low” and “extended period” language. Attention will be paid to the discussion regarding the removal of surplus liquidity from the financial system in coming months.
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