During this Christmas season, sometimes it’s nice to have “advanced knowledge” of at least one gift under the tree. As expected, there were no bad surprises for the market from the Federal Reserve’s Tuesday afternoon FOMC meeting, the last one for 2010. The market gained early on strong retail sales and the overall favorable economic data, but the end result for equities was a flat session when an improving growth outlook put upward pressure on interest rates. As of this morning, the market is showing weakness on the potential of a Spanish debt downgrade. Asian markets are mostly lower this morning, although Japan is holding up.
Here are four items that we were discussing in our offices this morning and thought would be of interest to our readers:
Wednesday’s economic data continues to surpass expectations. No doubt, the economy continues to accelerate out of this summer’s “soft spot.” All three of today’s activity related economic data reports (December Empire State manufacturing, November industrial production and capacity utilization) beat expectations and accelerated from the prior month.
The Fed isn’t content with the rise in the stock market and improving economic data. There are three reasons for this. First, the data improvement that we are seeing may not last. Second, unemployment is now higher than it was at the last Fed meeting in November. Third, core inflation is lower and below 1%. All of this probably means that the FOMC will continue to pursue Quantitative Easing (QE2) until it works to push prices higher and the unemployment rate lower or until the program ends in June 2011.
Municipal bonds had another difficult day. Selling pressure here continues strong, and similar to taxable markets, bond dealers are reluctant to participate aggressively with year-end coming up and the desire to keep balance sheets as pristine as possible for year-end reporting. The average 30-year AAA municipal yield is approaching 5%, a level that has increased demand in the past but is now being “dampened” because of weak technicals.
The U.S. Senate today is positioned to pass the bill to extend the Bush tax cuts along with payroll tax cuts and an extension of jobless benefits. After the bill makes it to the House, it is likely to pass with objections in the form of rules rather than amendments, amounting to a symbolic vote that won’t change the substance of the bill.
As always, email me here with questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA