Since Bernanke’s Press Conference

May 17, 2011

The first post-FOMC press conference was held three weeks ago less a day, and minutes from that April 27 meeting will be released tomorrow.  One of Chairman Bernanke’s assertions that day was that an end to the central bank’s second round of quantitative easing would be unlikely to impact long-term interest rates much, since it would not constitute a tightening of monetary policy.  Since the press conference, ten-year Treasury yields have dropped by 24 basis points.  It helps that oil prices have tumbled 14.3%, generating speculation that the commodity price bubble may have popped.  U.S. equity prices crested a few days after the FOMC met but are less than 2% lower on balance for the whole three weeks. 

Aside from released U.S. data, there has been both good and bad news since the press conference.  Osama Bin Laden was killed, and some Japanese data were not as depressed as feared.  But Middle Eastern politics remain an utter mess, and the European debt crisis deteriorated.  IMF Executive Director Strauss-Kahn, a key mediator of that crisis on whom great hopes rested was arrested.  Meanwhile, momentum picked up for the very hawkish Bank of Italy Governor, Mario Draghi, to succeed Jean Claude Trichet as ECB president.  The ECB has resisted any suggestion that European debt be restructured or re-profiled.  With markets focused upon Europe’s problems, the dollar advanced 3.5% against the euro while easing 1.4% against the yen.

Any positive U.S. data releases have been eclipsed by some notable disappointments particularly in the areas of unemployment, inflation and housing. 

  • New jobless insurance claims averaged 436,750 over the four weeks to May 7, a big setback from 395,750 over the previous four weeks to April 9 and 391K during the eight weeks to April 9.  The jobs component of the service-sector purchasing managers survey sank to a seven-month low. 
  • CPI inflation climbed to 3.2% for the year to April and rose 6.2% annualized between January and April, an acceleration from 3.9% in the prior three months and 2.5% in the three months to October 2010.  On-year U.S. PPI inflation of 6.8% last month was the highest pace since September 2008. 
  • Housing starts plunged 10.6% last month and were 8% weaker than forecast.  The Case-Shiller house price index recorded an eighth consecutive decline in February, falling at a 6.1% annualized rate between June 2010 and that month.

These were not the only unsettling economic reports.  Real GDP grew just 1.8% annualized last quarter, half of which reflected inventory building rather than real final sales.  Net exports made a small negative contribution to growth according to that first GDP estimate, but the drag probably will be revised to a larger figure in light of a greater-than-forecast 6% widening of the March trade deficit to $48.2 billion.  Treasury capital flow data showing just an $11.7 billion broadly defined long-term capital inflow in March after $16.1 billion in February suggested continuing discrete diversification by large offshore dollar holders away from the U.S. currency.  Industrial production was unchanged in April, and gains for February and March got revised lower.  The April 52.8 reading on the service-sector purchasing managers index after 57.3 in March showed the slowest rate of service activity expansion in eight months.  Most of the regional Federal Reserve manufacturing indices were weaker than expected.  Small business sentiment, according to the NFIB index, slid further to 91.2 last month from 91.9 in March and 94.5 in February.  Consumer confidence, which had been weak in the first third of 2011, improved somewhat in early May but remained poor by historic standards.  Chain store sales weakened in the first two weeks of the present month.

America experienced more catastrophic weather, and the persistent threat by Republicans in Congress to prevent a rise in America’s debt ceiling creates the risk of a shock to the recovery of immeasurably greater proportion than climate extremes.  So while good economic news also got reported — for example, a 244K advance of non-farm payroll jobs, most in a year, and a 3.0% increase in industrial orders, twice expectations — such bright spots tended to be drowned out by bad news.  Like we saw in late 2008-early 2009, the dollar performs best against a backdrop of bad, not good, news

It remains to be seen if the U.S. economic recovery can be sustained above stall-speed if unconventional policy support is removed.  Investors should have a better grasp of the answer by the autumn, and they needn’t watch U.S. trends alone.  Europe is well ahead of America on the road to fiscal right sizing.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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