Market Levels When the FOMC Has Met Before

April 28, 2010

The high state of alert among investors over Greece’s fiscal problems and the risks of contagion to other markets seemingly will prevent the Fed from modifying language predicting “exceptionally low levels of the federal funds rate for an extended period of time.”  A further upgrade of the assessment of economic conditions seems likely but continues to be counter-balanced by restrained cost pressures, stable longer-term inflation expectations, and very subdued inflation now.  A first-quarter growth rate of 3.5% annualized seems likely, and that would mean average growth of 3.8% sustained over the three quarters since mid-2009.  Growth in 1Q10 will not match the prior quarter’s 5.6% pace but will have a much better composition of demand sources.  U.S. industrial production expanded at a 7.8% annualized pace last quarter, and retail sales jumped 1.6% and 7.6% from a year before in March.  The latest batch of housing statistics beat expectations for the most part, and car sales in March were 47% above year-earlier levels.  The index of leading economic indicators jumped 1.4% in March, and exports in January-February surpassed the year-before level by 14.8%.  The IMF World Economic Outlook this month projected average GDP expansion in the United States of 3.1% in 2010 and 2.6% next year.  The PMI readings in March increased by 3.1 points to 59.6 in manufacturing, and 2.4 points to 55.4 in services, and both reports had orders and output components that were at 60.0 or above.

Core CPI inflation has slid to 1.1%, and core PPI is at 0.9%.  Capacity usage of 73.2% in March was 1.2 points above December’s reading but low by historical standards.  Non-farm payroll job growth of 162K in March was the biggest increase since March 2007, but the 9.7% unemployment rate remains far above the level at which the Fed started increasing interest rates in past cycles.  Long-term unemployment is a worse problem than any previous time since the second world war.

In response to improved financial market functionality, the Fed has only one remaining special liquidity facility, the Term Asset-Backed Securities Loan Facility, and that program is slated to end at midyear.  In his February semiannual testimony to congress, Chairman Bernanke indicated that paid interest on bank reserves at the Fed, rather than the Fed funds rate, will likely serve as the cutting edge of policy when tightening begins, but the “extended period” phraseology suggests that 5-6 months at least will go by before that process begins.

Since the last FOMC meeting three weeks ago, the dollar has advanced similarly by 4.2% against the euro and 3.9% versus the yen.  The ten-year Treasury yield is seven basis point higher than then but comfortably below 4.0%.  The DJIA has risen 3.7%, while oil is 1.8% firmer.  The FOMC statement is due in less than three hours at around 18:15 GMT.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3207 94.16 3.74 11043 82.91

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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