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Volume 7, Issue 20
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Volume 8, Issue 2 |
January 25, 2010
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The Federal Reserve/Monetary Policy
· Following its regular policy meeting on Wednesday, the Fed's press
release is likely to say again that "...economic activity is likely
to remain weak for a time...," that it "...expects inflation will
remain subdued for some time" and that "...conditions warrant
exceptionally low levels of the Federal funds rate for an extended
period." The Fed will continue a stimulative policy and the funds
rate will probably be <0.25% through at least the third quarter.
· Misguided and worrisome populist/main street anger against
banks/Wall Street, fanned by pandering politicians, is threatening
Bernanke's reappointment as Fed chairman. Needless uncertainty about
the appointment has weighed on markets. There could be a "relief"
rally if/when he is confirmed.
· Monetary policy appears stimulative based on a 0.11% average fed
funds rate in recent weeks, 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 $1.15 trillion of mortgage-backed and
Federal agency securities. But bank loans are 7% below a year ago
and money supply growth has slowed sharply. The economic trauma of
the past year has no doubt impacted expected consumer, business and
investor behavior, which raises uncertainty about just how
stimulative monetary policy is.
· Fiscal policy appears stimulative with the Federal deficit at
unprecedented levels. The high unemployment rate and low interest
rates will keep Congress and the Administration searching for more
ways to fuel economic and job growth. Increased uncertainty about
major policy initiatives - health and financial regulation for
example - is an economic and employment negative.
The Economy/Inflation
· Despite the above-mentioned increases in uncertainty and severe
weather disruptions in the first quarter, the economic recovery is
likely to endure, although the 2010 outlook has weakened a bit.
Aggregate dollar demand (nominal/current dollar GDP) and top-line
corporate revenue should rise about 4% in 2010 and 5% in 2011 vs.
-1.2% in 2009. Real GDP should rise a moderate 2.5% to 3% in 2010
and 3+% in 2011. Such rates of growth wouldn't be enough to reduce
unemployment much. 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 and
commercial construction will decline.
· Underlying inflation currently appears to be running at the low
end of the Fed's perceived comfort zone of 1.5% to 2%. Commodity
prices have dropped the past two weeks and the dollar has been firm
in currency markets for the past three months. The 10-year inflation
rate forecast implied in Treasury inflation-protected bonds (TIPs)
yields was a moderate 2.3% at Friday's close.
Financial Markets
· The 5.1% drop in the S&P 500 in the past three trading days is
sobering. Stocks and high-yield corporate bonds clearly embody more
risk following their strong rallies.
· However, the Fed's monetary policy should remain supportive of
markets, i.e. negligible short-term interest rates will keep
investors seeking higher yields in stocks, bonds, and commodities.
· Sustaining the economic recovery will likely require stock market
strength. Stocks appear somewhat undervalued vs. Baa corporate bonds
(Stock Market Barometer). Based on forecasted year-ahead earnings
(subject to considerable forecast error), the price/earnings ratio
for the S&P 500 at Friday close was 14.5 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 11 months.
· The great improvement in financial markets is reflected in normal
credit quality yield spreads (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, much of which has been used to
pay down bank loans. The economic recovery isn't likely to be strong
enough to push long rates up substantially this year.
· Mortgage rates have declined again and mortgage lending has picked
up. The Fed has completed its planned $175 billion purchase of
federal agency securities and 80% of its planned $1.25 billion
purchase of mortgage-backed securities. If the Fed ends its
mortgaged-backed purchases at the end of March as planned, mortgage
rates will likely rise somewhat relative to Treasury bond rates.
· The $ 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 |
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4.3 |
3 |
2.9 |
2.8 |
3.2 |
0.4 |
-2.5 |
2.9 |
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1.4 |
1.5 |
1.5 |
1.4 |
1.4 |
3.3 |
0.1 |
1.7 |
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1.2 |
1.5 |
1.3 |
1.4 |
1.5 |
2.4 |
1.5 |
1.4 |
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3.47 |
3.74 |
3.95 |
4.1 |
4.25 |
3.67 |
3.26 |
4.01 |
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0.15 |
0.12 |
0.15 |
0.15 |
0.4 |
1.98 |
0.18 |
0.21 |
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16.33 |
17 |
18.4 |
19.65 |
20.25 |
49.51 |
56.03 |
75.3 |
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n/a |
68.2 |
33.2 |
24.5 |
24 |
-40 |
13.2 |
34.4 |
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5.66 |
5.75 |
5.95 |
6 |
6.1 |
28.38 |
22.41 |
23.8 |
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-20.8 |
-3.5 |
9.4 |
12.1 |
7.8 |
2.3 |
-21 |
6.2 |
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1083.3 |
1122 |
1200 |
1225 |
1250 |
1221.3 |
944.8 |
1199.3 |
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18.8 |
38.9 |
34.5 |
23 |
15.4 |
-17.3 |
-22.6 |
26.9 |
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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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