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Volume 7, Issue 20
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Volume 8, Issue 8 |
April 19, 2010
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The Federal Reserve/Monetary
Policy
· In next Wednesday's policy statement (April 28), the Fed is likely
to continue its pledge of "exceptionally low levels of the Federal
funds rate for an extended period." Although financial market
conditions and the economic outlook are much improved, core
inflation is running below the Fed's presumed target range and the
unemployment rate is still at 9.7%. The Fed funds rate is likely to
be <0.25% through year end.
· Monetary policy appears stimulative based on a negligible Fed
funds rate and an unprecedented jump in Federal Reserve credit.
Total bank loans outstanding appear to be stabilizing after the
steepest drop since the Great Depression. Very rapid money growth in
2008 and 2009 has unwound as more confident investors have shifted
dollars from low-yielding bank deposits to bonds, stocks and
commodities. Given the economic trauma of 2008-2009 and huge
gyrations in monetary data, there is more uncertainty than usual
about the timing and impact of Fed actions on economic activity.
· There was a cyclical rise in tax receipts in March and Federal
outlays declined related to the TARP program. However, the Federal
deficit is still running a very large 9% to 10% of GDP and the
long-run deficit outlook is bleak even assuming the large tax
increases in the Administration's budget. State and local government
expenditure cuts have been a drag on the economy.
The Economy/Inflation
· It will be announced today that the Index of Leading Economic
Indicators rose for the 12th consecutive month in March and that the
index is up nearly 11% yr/yr. The index turned up three months
before the economy began to expand in July 2009 and has accurately
predicted continuing economic growth. Aggregate dollar demand
(nominal/current dollar GDP) should rise 4+% this year and 5% in
2011 vs. -1.3% in 2009. Real GDP should rise 3% to 3.5% this year
and next vs. a -2.4% in 2009. The recovery is being led by business
investment in inventory and equipment, exports, housing and Federal
government purchases. Consumer, state and local government spending
will lag and commercial construction will decline sharply.
· The core Consumer Price Index was 1.1% above a year ago in March,
below the Fed's presumed comfort zone of 1.5% to 2%. Commodity price
indexes have leveled off in the past six months following a strong
gain. The dollar has been relatively stable in currency markets over
the past eight months. The 10-year inflation rate forecast implied
in Treasury inflation-protected bonds (TIPs) yields was a moderate
2.33% at Friday's close.
Financial Markets
· Fundamentally, the Fed's monetary policy should be supportive of
markets for at least several more months, 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
(a leading indicator) strength. Stocks appear fairly valued vs. Baa
corporate bonds (Stock Market Barometer). Based on forecasted 2010
earnings (subject to considerable forecast error), the
price/earnings ratio for the S&P 500 at Friday close was 15.4 vs. a
19-average over the past 22 years.
· Despite their strong advance, stocks will likely outperform
Treasury bonds and cash in the year ahead, but the strongest part of
the rally - fueled by the easing of monetary policy and the related
drop in high-yield bond yields - has very likely already occurred.
Stocks obviously embody more risk following their rebound in the
past 13 months.
· So far, the economic expansion has not been strong enough to bid
long-term interest rates up. Although Treasury bond yields are far
above their financial crisis lows, the trend of corporate and
tax-exempt bond yields and mortgage rates has been essentially flat
the last six months.
· Credit quality bond yield spreads are in their historical normal
range (Bond Market Barometer). Treasury bonds may slightly
under-perform other bond sectors as Treasury bond supply rises to
fund the large Federal deficit.
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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 | | 5.6 | 2.9 | 3.1 | 3.4 | 3.6 | 0.4 | -2.4 | 3.2 | | 2.5 | 1.4 | 1.5 | 1.5 | 1.4 | 3.3 | 0.2 | 1.8 | | 1.8 | 1 | 1.2 | 1.3 | 1.3 | 2.4 | 1.5 | 1.3 | | 3.47 | 3.72 | 4 | 4.15 | 4.3 | 3.67 | 3.26 | 4.04 | | 0.15 | 0.13 | 0.15 | 0.15 | 0.2 | 1.98 | 0.18 | 0.16 | | 17.16 | 17.17 | 18.85 | 20.25 | 21.15 | 49.51 | 56.86 | 77.42 | | n/a | 69.8 | 36.5 | 28.3 | 23.3 | -40 | 14.8 | 36.2 | | 5.66 | 5.46 | 6.05 | 6.15 | 6.35 | 28.38 | 22.41 | 24.01 | | -20.8 | -8.4 | 11.2 | 15 | 12.2 | 2.3 | -21 | 7.1 | | 1083.3 | 1118.1 | 1215 | 1245 | 1275 | 1221.3 | 944.8 | 1213.3 | | 18.8 | 38.4 | 36.2 | 25 | 17.7 | -17.3 | -22.6 | 28.4 |
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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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