Fed Would Raise Interest Rates If Inflation Picks Up

George Brooks |

FOMC extends low federal funds rateInvestor's first read--Brooksie's  edge before the open

Thursday, January 26, 2012

DJIA:  12,758.88    S&P 500:1326.06

I am surprised investors are so heartened by the announcements coming out of this week’s FOMC meeting. Essentially, Fed policy hasn’t changed.

Whether stocks rally is not a Fed issue, it’s about whether Europe can assure global markets it has the tools to prevent a meltdown.

The Fed has indicated interest rates will remain low until the end of 2014. That doesn’t prevent investors from exiting bonds and buying stocks. Money managers and investors will seek a decent return, and they won’t find it in bonds.

I’m not so sure what the big fuss was yesterday, aside from a new Fed reporting format.

Some interviewees on CNBC are recommending bonds based on the Fed’s report and low inflation rate. If the latter were to pick up dramatically, are we supposed to believe the Fed would hold to its current policy ? In the interim, government borrowing is historically cheap.

What’s important here is, Fed policy will be less likely to be the trigger for a plunge in stock prices over the near-to-intermediate-term, as it so often has been.

Nevertheless, it had a big positive impact today and that changes yesterday’s forecast for a consolidation/correction. I now need to see more market action before concluding that.

Author's note: I am still in the hospital, and believe me this is not a place to write about the market.

THE  ECONOMY THIS WEEK:

This is a big week for economic indicators, because much of this year’s strength has been derived from the expectation of our economy gaining enough traction to counter the economic drag that is “expected” from a European recession.

This week’s economic reports need to confirm the positive trend.

Tuesday:

  •  ICSC Goldman Store Sales (7:45 a.m.): For theweek ending Saturday Jan. 21 covering same and comparable store sales.

Wednesday 

  • (8:30 a.m.) Producer Price Index: Has been bumping along sideways for a year. Today’s  report for December showed a 0.1 percent drop at an annual rate vs. a 0.3 percent rise in November.
  • (9:15 a.m.) Industrial Production. Declined in 0.2 percent in November after October surge of 0.7 percent. December’s report show a gain of 4.0 percent.
  • (10 a.m.) Housing Market Index a survey concerning the economy and housing market conditions including current house sales, six months projected sales and the traffic of prospective buyers of new homes. It jumped two points in December for the third straight gain.

Thursday:

  • Jobless Claims (8:30 a.m.): Initial claims fell 50,000 for the week ending Jan. 14 to 352,000 the biggest gain since Sept. 2005 when the economic expansion was in full gear. It will be interesting if this is revised downward. If not, it lends support to an acceleration in our economy.
  • Durable Goods (8:30 a.m.): New orders  jumped 3.7% in November after three months of stagnation.
  • Leading Indicators (10 a.m.):  A composite of 10 leading economic indicators. It will include majors revisions to the Conference Board’s index. Prior releases are NOT comparable hmmm!
  • New Home Sales (10 a.m.): Rose 1.6% in Nov. to an annual rate of 315,000. It has firmed up since August as mortgage rates continued to edge down.

Friday:

  • (8:30 a.m.) GDP: Q4 GDP growth is expected to show a pickup of 3% after a 1.8% increase in Q3.
  • (9:55a.m.) Consumer Sentiment: This survey of 500 households rose to 74.0 in mid-January  from 69,9 in December and 55.7 in August.

CONCLUSION:

I MAY BE ALONE ON THIS, and WRONG, but there is tooo much at risk here globally for the euro-area countries NOT to develop a solution that strengthens the European Union.  I sense this problem is heading at warp speed for a solution that removes the risk of  a global meltdown, and that solution most likely means a reduction in euro-area members. That could mean a week of turmoil and confusion somewhat on the order of a stock market selling climax. It could also be the best buying opportunity since early March 2009.  It could be devastating to long-term bond values as investors bail out and buy stocks.  Then too, solutions could be agreed on that reduce the risk of meltdown without the carnage. This needs to be considered as possible, especially because too few people are seeing it happen.

EUROPEAN UNION/EUROZONE

The European Union (EU) is an economic and political union of 27 sovereign member states    with origins going back to 1958, but which was officially established by the Maastricht Treaty in 1993.  Its goals are a free movement of goods, services, capital and people differing in  life style, language, economies, geography, religion, politics and history.

Its 27 Members include: Austria, Belgium Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.  The EU comprises  a population exceeding 500 million people a GDP exceeding 16.2 billion USD, some 20% of the world’s GDP.

Important components of the EU include: European Parliament, European Commission, Council of European Union, European Council  Court of Justice and European Union, and the European Central Bank.

The euro area (eurozone)  is an economic and monetary union, EMU, of 17 member nations that use the “euro” as their common currency and sole legal tender. Its members include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

While  the goal of single currency originated with the European Economic Community, EEC, in 1969,  it was not until 1993 that members were legally bound to start the monetary union no later than January 1, 1999. At that point,  the euro was launched after which it  was an “accounting” currency until January 1, 2002 when euro notes and coins were issued and national currencies phased out in the eurozone.

The European Central Bank (ECB) is the central bank for the eurozone.  Governed by  its president, Mario Draghi,  and a board of the heads of national central banks, the ECB’s primary responsibility is to maintain the euro’s purchasing power and price stability within the eurozone.

The Eurosystem is the monetary authority of the eurozone comprised of the ECB and the central banks of its member states, which are charged with applying the  ECB’s  policy.

The European Commission, comprised of one commissioner from each  of the 27 member states,  represents the interests of the EU, drafts proposals for laws, and manages the day-to-day business and disbursement of funds.

European Banking Authority (EBA): Established on Jan. 1, 2011 as a regularity agency to conduct stress tests of banks in order to detect weaknesses in capital structure. It has the power to overrule national regulators if necessary to prevent unfair competitive advantages between jurisdictions. It issues a report, Common Reporting Framework (COREP) covering capital requirements regarding credit risk, market risk, operational risk, fund and capital adequacy ratios.

The European Financial Stability Facility (EFSF): created by eurozone members to safeguard financial stability in Europe. Authority includes loans to countries in need, intervention in primary and secondary markets pursuant to ECB analysis, finance recapitalizations of financial institutions. It is backed by guarantee from the eurozone members for  a total of 780 billion euros and has a lending capacity of 440 billion euros. (not considered adequate)

One euro = 1.3035 U.S. dollar (12/21)

Prominent names:  European Union  President:  Herman van Rompuy, European Central Bank President: Mario Draghi, European Commission President: Jose Manuel Barroso, German Chancellor: Angela Merkel, French President: Nicolas Sarkozy, Italy Prime Minister: Mario Monti,  EFSF President: Klaus Regling

SEQUESTRATION – TRIGGER  SPENDING CUTS

While the SuperCommittee failed to agree on cuts, I am keeping this up FYI, since it will continue to get press coverage prior to the “trigger” in January.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if   the committee’s legislation has not been enacted.

Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.

Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche  ($1.2 – $1.5 trillion) of debt limit increase.

Fall/Winter 2012: When additional $2.1 – $2.4 trillion of borrowing authority from this law runs out.

Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary  to meet spending cuts required by the “trigger.”

Recent blog headlines:

Jan. 3,    DJIA: 12,224  “Good Start, but Follow-Through Key
Jan. 4,    DJIA: 12,397  “Buyers Expected on Any Weakness
Jan. 5,    DJIA:12,418   “U.S. Economy Gaining Traction
Jan.6,    DJIA: 12,415.  “Long-Term Bonds at Risk Via Euro-Meltdown/Solution –Money Out of Bonds Into Stocks
Jan.9     DJIA:  12,359  “Flight From “Safe” to “Risk” Assets BIG News of 2012?
Jan.10   DJIA:  12,392  “Odds of 600 to 1,000-Point Surge in DJIA Improving
Jan. 11  DJIA:  12,462  “Buyers on Dips
Jan. 12  DJIA:  12,449  “Big 2012 Story: Stampede Out of Treasuries Into Stocks?
Jan. 13 DJIA:  12,471   “Europe: Catharsis or Solution = Buying Opportunity
Jan. 17 DJIA: 12,422   "Market Defying S&P Downgrade – But Rally Must Hold"
Jan. 18 DJIA: 12,482    "World Bank Forecast to Test Bull’s Resolve"
Jan 19 DJIA: 12,578 "What Happens If All That Money Parked in a “Safe” Haven Pours Into Stocks?"
Jan 20 DJIA: 12,623 "Two European Meetings Next Week to Set Tone of the Market"
Jan 23 DJIA: 12,720 "Europeans Seeking Long-Term Economic Cure"
Jan 25 DJIA: 12,675 "Consolidation, Correction Likely though US Stocks Hold Strong Against EU Turmoil"

George  Brooks

*Bloomberg.Com

**National Journal

Note: I will be in orthorpedic surgery today. I may not post Tuesday, but hope to post the rest of the week.

………………………………………………………………………………………………

The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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