The Fed action of last week was termed as revolutionary by some. Although Fed Chairman Ben Bernanke acknowledged that inflationary expectations were stable and deflationary risks prevail, insufficient economic growth has promoted the central bank to announce QE III measure. This bold move has prompted BMO Capital Markets to expect more from the Fed until the unemployment rate begins to move in a downward trajectory and drops off to no higher than the mid-to-low 7 percent range.
The FOMC announced QE III by way of its decision to buy additional Mortgage Backed Securities at a rate of $40 billion each month. As expected, the Fed extended the timeframe for its extremely accommodative policy stance pledge to mid-2015. Meanwhile, the Operation Twist program as well as the Fed's policy of re-investing principal payments from the Fed's holdings are set to continue.
ING stated that the way QE III was crafted makes it less likely that adverse demand shocks will permanently reverse the recent fall in real interest rates and the rise in expected inflation.
The Fed has in fact committed to a very big schedule of long-term securities purchases through the end of 2012, which is just three months away. However, because the policy is open ended, the central bank can opt to continue the purchases or pare back depending on the evolving economic scenario. The logic behind the QE is kick starting the labor market by boosting the economy. FTN Capital Markets notes that the transmission mechanism is loan growth. Sadly, there has been very little loan growth. The job market condition now assumes importance and will be closely watch to see in which the Fed moves.
A Federal Reserve report released last week revealed that industrial production fell 1.2 percent month-over-month in August following a downwardly revised 0.5 percent increase in July. According to the Fed, hurricane Isaac accounted for one-fourth of the drop. Manufacturing fell 0.7 percent, dragged by weakness in consumer goods and business equipment output. Mining and utility output also declined. Capacity utilization declined 1 percentage point to 78.2 percent.
The Commerce Department's retail sales report showed a 0.9 percent solid increase in retail sales for August. Auto sales were up 1.3 percent, the highest increase since November 2007. Gasoline station sales climbed by 5.5 percent. That said, excluding autos, gas and building materials, core retail sales that go into GDP calculation rose a disappointing 0.1 percent.
According to the Labor Department, producer prices rose by 1.7 percent month-over-month in July. Economists expected a more modest increase. The producer price inflation was boosted by a 6.4 percent jump in energy prices and a 0.9 percent increase in food prices. The annual producer price inflation rate was 2 percent. The core reading was at 0.2 percent, in line with estimates, rendering the annual rate of the core inflation measure at 2.5 percent.
Wholesale inventories at the end of July were up 0.7 percent. Inventories rose 5.3 percent from the year-ago period. At the same time, wholesale sales edged down 0.1 percent month-over-month, but rose 2.7 percent year-over-year. The wholesale inventories to sales ratio came in at 1.21 compared to 1.18 in July of last year.
Outstanding consumer credit fell by $3.3 billion in July following an upwardly revised $9.8 billion increase in June. Economists expected an increase of $9.8 billion. Revolving credit tied to credit cards fell by $4.8 billion compared to a $1.6 billion increase in non-revolving credit.
The U.S. trade deficit widened to $42 billion in July, although the deficit was narrower than economists had expected. Exports fell 1 percent month-over-month, while imports were down 0.8 percent, marking the fourth straight month of declines. In real terms, the trade deficit widened to $46.5 billion from $44 billion in June.
After the Fed support, the markets now turn their attention to fundamental data to assess the economic momentum. The focus of the unfolding week is on a trio of housing market data, a couple of regional manufacturing reports and a slew of Fed speeches, including the one from Bernanke.
Traders may stay focused on the National Association of Home Builders' housing market index for September, the National Association of Realtors' existing home sales report, the Commerce Department's housing starts report for August and the results of the regional manufacturing surveys by the New York Federal Reserve and the Philadelphia Federal Reserve.
It would be interesting to hear from the several Fed speakers scheduled to deliver public addresses this week to understand the Fed's thinking on the economy and the need to support recovery. The Conference Board's leading economic indicators index and announcements concerning Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.
Builder sentiment is expected to improve further in September, aided by better affordability. Inventory situation is also improving, as reflected by the months supply of both existing and new homes currently below its historic median.
The regional manufacturing surveys are expected to show modest improvement in September, although conditions are most likely to have remained weak.
The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 am ET. The headline general business conditions index for September is expected to come in at -2.
Manufacturing activity in the region contracted in August. The headline business conditions index fell to -5.9 in August from 7.4 in July. The new orders index fell 3 points to -5.5, while the order backlogs index rose 3 points. The employment index declined 2 points to 16.5. The 6-month outlook index also declined, dropping 5 points to 15.2, the weakest level since October 2011.
Chicago Federal Reserve President Charles Evans is due to speak to the Bank of Ann Arbor Breakfast Meeting on "Perspectives on Current Economic Issues" at 8 am ET.
The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for July at 9 am ET.
The National Association of Home Builders is scheduled to release the results of its September survey on homebuilders' confidence at 10 am ET. The consensus estimates call for the index to rise to 38.
Builder sentiment improved further in August. The headline index rose 2 points to 37 in August, the highest level since February 2007. The current sales conditions index rose 3 points to 39 and the index measuring prospective buyer traffic also increased 3 points to 31, while the sales expectations index edged up 1 point to 44.
New York Federal Reserve Bank President William Dudley is scheduled to speak to the Morris Council Chamber of Commerce, in Florham Park, New Jersey at 11:30 am ET. He will repeat his prepared remarks in an afternoon appearance at the Fox Valve factory in Montclair. Richmond Federal Reserve Bank President Jeffrey Lacker will speak to the Money Marketeers of NYU, in New York at 6:15 pm ET.
Federal Reserve Chairman Ben Bernanke will meet with Senate Finance committee Wednesday to focus on economic policy, fiscal cliff.
A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which are the number of permits issued for new housing units each month, is slated to be released at 8:30 am ET. Economists estimate housing starts for August to come in at 768,000, while building permits are expected to have slipped to 802,000.
Housing starts declined 1.1 percent month-over-month to a seasonally adjusted annual rate of 746,000 units. However, the drop was from June's strong reading of 754,000 units. Single-family starts fell 6.5 percent, while the volatile multi-family starts rose 12.4 percent. Building permits rose 6.8 percent to a 4-year high of 812,000 units.
Kansas City Federal Reserve President Esther George is due to deliver the opening remarks at a Kansas City Fed jobs conference at 9:45 am ET.
The National Association of Realtors is scheduled to release its report on existing home sales for August at 10 am ET. Economists estimate existing home sales of 4.550 million for the month.
Existing home sales rose 2.3 percent month-over-month to a seasonally adjusted annual rate of 4.47 million units in July. Sales rose in all regions, with the exception of the West, where sales remained unchanged. The median price of an existing home rose 9.4 percent year-over-year to $187,300. Inventories measured in absolute numbers rose slightly to 2.4 million units, while inventories measured in terms of months of supply fell to 6.4 months from 6.5 months in June.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended September 14th at 10:30 AM ET.
Crude oil stockpiles rose by 2 million barrels to 359.1 million barrels in the week ended September 7th. Inventories were above the upper limit of the average range for this time of the year.
Distillate stockpiles rose by 1.5 million barrels yet remained below the lower limit of the average range. Meanwhile, gasoline inventories fell by 1.2 million barrels and were in the lower half of the average range. Refinery capacity utilization averaged 88.3 percent over the four weeks ended September 7th compared to 90.3 percent over the previous four weeks.
Federal Reserve Bank President Richard Fisher is scheduled to speak to the Harvard Club of New York City on the "Economic and Monetary Policy Outlook" at 7 pm ET.
Boston Federal Reserve Bank President Eric Rosengren is scheduled to speak to the South Shore Chamber of Commerce in Quincy, Massachusetts at 7:44 am ET.
The Labor Department is due to release its customary jobless claims report for the week ended September 15th at 8:30 AM ET. Economists expect claims to decline to 373,000 from 382,000 in the previous week.
The number of individuals claiming unemployment benefits rose 12,000 to 382,000 in the week ended September 8th. The claimant count faced upward pressure due to hurricane Isaac. Meanwhile, continuing claims for the week ended September 1st declined by 49,000.
Atlanta Federal Reserve Bank President Dennis Lockhart will speak at the Federal Reserve Bank of Kansas City on the subject, "The Future of Workforce Development" at 9:30 am ET.
The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 am ET. Economists expect the diffusion index of current activity to show a reading of -4 for September.
The Philadelphia Federal Reserve's manufacturing survey showed that manufacturing activity in the region continued to contract. The headline manufacturing index improved to -7.1 in August from -12.9 in July. The new orders index rose 1.4 points, yet remained in contraction zone at -5.5, while the order backlogs index declined by 6.7 points to -16.2. The employment index remained little changed at -8.6. The 6-month outlook index fell by about 7 points to 12.5, the lowest level in about a year.
The Conference Board is scheduled to release a report on the U.S. leading economic indicators index for August at 10 am ET. The consensus estimate calls for unchanged reading for the index.
Minneapolis Federal Reserve Bank President Naryana Kocherlakota is scheduled to speak to the Gogebic Community College in Ironwood, Michigan at 12:30 pm ET.
Cleveland Federal Reserve Bank President Sandra Pianalto will speak at the Miami University Farmer School of Business at 5 pm ET. St. Louis Federal Reserve Bank President James Bullard is due to speak at the University of Notre Dame at 6:30 pm ET.
Lockhart speaks to the Atlanta Institute of Internal Auditors on "U.S. Economic Outlook and Monetary Policy" at 12:40 pm ET.
by RTT Staff Writer
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