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Volume 7, Issue 20
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Volume 8, Issue 1 |
January 11, 2010
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The
Federal Reserve/Monetary Policy
· With the unemployment rate at 10% and core inflation seemingly
within the Fed's comfort zone, the Fed will maintain a stimulative
policy and keep the Fed Funds rate <0.25% "for an extended period" -
probably into at least the third quarter.
· Monetary policy appears stimulative based on a 0.12% average Fed
Funds rate in recent months, a 130% jump in Federal Reserve credit
over the past 15 months, and Fed direct support of credit markets,
such as the Fed's purchases of $900 billion of mortgage-backed and
$175 billion Federal agency securities in the past 11 months.
· Fed support has greatly improved financial market conditions and
inflated stock, corporate bond and commodity prices. It has also
reversed a contraction in aggregate dollar demand, but a 7% decline
in bank loans over the past year has offset some Fed stimulus. A
sharp slowing of money supply growth is likely just the unwinding of
very rapid growth in 2008 and early 2009 as more confident investors
have shifted from insured deposits in the money supply to riskier
assets not counted in the money supply. However, the decline in
money growth has been steep enough to raise a few doubts about just
how stimulative monetary policy is.
· Fiscal policy appears stimulative with the Federal deficit at
unprecedented levels. The high unemployment rate will keep Congress
and the Administration searching for more ways to fuel the economy
and job growth.
The Economy/Inflation
· Although severe weather is causing disruptions in the first
quarter, the economic recovery is likely to endure. Aggregate dollar
demand (nominal/current dollar GDP) and top-line corporate revenue
should rise 4% to 5% in 2010 and 2011 vs. -1.2% in 2009. Real GDP
should rise at a moderate 3+% rate in 2010 and 2011. The recovery
will be led by business investment in inventory and equipment,
exports, a reversal in housing and Federal government purchases.
Consumer spending will lag the economy and commercial construction
will decline. Although the unemployment rate will stay high, modest
job growth should emerge by the end of the first quarter.
· Underlying inflation currently appears to be running at the low
end of the Fed comfort zone of 1.5% to 2%. The dollar has been quite
stable in currency markets over the past five months, but a 43% jump
in the CRB commodity price index since mid-February is a concern, as
is the 2.47% 10-year inflation rate forecast implied in Treasury
inflation-protected bonds (TIPs) yields. Some of the recent rise in
energy and agricultural commodities is due to record cold weather.
Financial Markets
· Negligible short-term interest rates will continue to keep
investors looking for better yields in other assets such as stocks,
bonds, and commodities. However, long-term interest rates have risen
modestly since early October when such rates may have hit cyclical
lows. The economic recovery isn't likely to be strong enough to push
long rates up substantially this year.
· Financial market conditions have improved greatly and credit
quality yield spreads have narrowed to normal levels (Bond Market
Barometer), but Treasury bonds may slightly under-perform other bond
sectors as Treasury bond supply rises to fund the large federal
deficit. Corporations have taken advantage of improved conditions to
strengthen balance sheets by issuing stock and long-term debt.
· Sustaining the economic recovery will require stock market
strength. Fed policy will continue to be supportive of stocks, but
the trends of the S&P 500 and foreign stock prices are expected to
be only mildly upward following their impressive 69% and 85% jumps
since March 9. Somewhat more investor caution is warranted after
such a surge in stocks and riskier bonds, but stocks appear fairly
valued vs. Baa corporate bonds (Stock Market Barometer). Based on
forecasted year-ahead earnings (dependent on a pick up in revenue
growth and subject to considerable forecast error), the
price/earnings ratio for the S&P 500 is 15+ versus a 19-average over
the past 20 years. Stocks should outperform Treasury bonds and cash
in the year ahead, but stock and high-yield bond markets embody more
risk following their big gains over the past 10 months.
· The dollar dividend on the S&P 500 has bottomed and is expected to
rise 6% in 2010.
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Economics Today is a monthly e-mail service provided by
Reliance Trust Company.
Main office: 1100 Abernathy Road, 500 Northpark, Suite 400, Atlanta, GA
30328 |
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Economic Outlook
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| Qtr. 4 |
Q1 |
Q2 |
Q3 |
Q4 |
2008 |
2009 |
2010 |
| 4.2 |
3.2 |
3.1 |
3.1 |
3.4 |
0.4 |
-2.5 |
3 |
| 1.4 |
1.5 |
1.5 |
1.4 |
1.4 |
3.3 |
0.1 |
1.7 |
| 1.2 |
1.5 |
1.3 |
1.4 |
1.5 |
2.4 |
1.5 |
1.4 |
| 3.47 |
3.85 |
4 |
4.15 |
4.25 |
3.67 |
3.26 |
4.06 |
| 0.15 |
0.15 |
0.15 |
0.15 |
0.5 |
1.98 |
0.18 |
0.24 |
| 16.21 |
16.53 |
18.2 |
19.25 |
20.2 |
49.51 |
55.91 |
74.18 |
| n/a |
63.5 |
31.8 |
22 |
24.6 |
-40 |
12.9 |
32.7 |
| 5.66 |
5.75 |
5.95 |
6 |
6.1 |
28.38 |
22.41 |
23.8 |
| -20.8 |
-3.5 |
9.4 |
12.1 |
7.8 |
2.3 |
-21 |
6.2 |
| 1083.3 |
1165 |
1210 |
1240 |
1265 |
1221.3 |
944.8 |
1220 |
| 18.8 |
44.2 |
35.7 |
24.5 |
16.8 |
-17.3 |
-22.6 |
29.1 | | |
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Real GDP, % annual rate |
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Inflation, PCE % an. rate |
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Core inflation (ex food&energy) |
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10 Year Treasury bond (%) |
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Fed funds rate (%) |
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S&P 500 operating earnings($s) |
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S&P 500 op. earn. Yr/Yr % chg. |
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S&P 500 dividends ($s) |
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S&P 500 div Yr/Yr % chg. |
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S&P 500 Index (average) |
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S&P 500 Index, Yr/Yr % chg. |
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Economic and Financial Data |
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Disclaimer
The material herein is based on data
from sources considered to be reliable,
but it is not guaranteed as to accuracy,
does not purport to be complete and is
subject to change without notice. It is
not to be construed as a representation
by us or as an offer or the solicitation
of an offer to sell or buy any security.
Any opinions expressed are subject to
change. From time to time, this firm,
its affiliates, and/or its individual
officers and/or members of their
families may have a position in the
subject securities which may be
consistent with or contrary to the
recommendations contained herein; and
may make purchases and/or sales of those
securities in the open market or
otherwise. This communication is for
informational purposes only. Use by
other than intended recipients is
prohibited. Sender accepts no liability
for any errors or omissions arising as a
result of transmission. Any comments or
statements made herein do not
necessarily reflect those of Reliance
Financial Corporation or its affiliates.
Securities and Insurance Products offered through Reliance Securities, LLC. Member FINRA/SIPC.
Not FDIC Insured * No Bank Guarantee * May Lose Value *
Not a Deposit * Not Insured by any Federal Government Agency.
Arnie Dill, Ph.D.
Consulting Economist
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