The FOMC meeting ended with no serious action.  The only change was an alteration/toughening of language indicating the Fed was poised to act and provide accommodation, as opposed to being ‘prepared to take action.’  A small distinction, but an important one.  While markets were clearly disappointed in a lack of action (as they were with similar lack of easing by the European and U.K. central banks this week), there are two issues to consider:  either the economy is not weak enough to warrant additional action (or the data remains inconclusive at this point), or the tools the Fed is considering (‘unconventional’ stimulus) are not viewed as being quite as effective going forward. Read more

Economic news on the U.S. front was mixed this week, although signs of a slowdown continue to persist.

Firstly, the advance estimate of the 2nd Quarter U.S. GDP came out at a +1.5% annualized rate.  Believe it or not, this was largely in line with consensus expectations (lower than some, higher than some others from analysts who have been engaged in a race to lower these estimates as fast as possible).  From a composition standpoint, growth in final domestic sales increased by the same +1.5%, consumer spending increased more than anticipated and investment in equipment/software and housing were up +7% and +10% respectively.  However, government spending was down on both the federal and state/local levels.  The GDP price index and core price indexes grew in the same range (+1.6% and +1.8%). Read more

Positive

Headline CPI was unchanged in June, in line with expectations.  The food index rose 0.2% in June.  The energy index continued to fall by 1.4%, the third straight declining month following 1.7% and 4.3% drops in April and May respectively.  Fuel oil saw the steepest price reduction with a 7.9% drop from May.  Excluding food and energy, the core index increased 0.2% month-over-month and was up 2.2% year-over-year.  Overall, inflation risk is muted. Read more

It was a bit of a light week from an economic news standpoint.

The University of Michigan Consumer Confidence survey was weaker for July, falling from 73.2 to 72.0, which wasn’t a complete surprise.  The ‘expectations’ part of the survey fell by a few points, while the ‘current conditions’ component rose.  Consumers’ expectations for future inflation have fallen between 2.7-3.0% for almost every month for the past several years.  This is in line with current inflation, and historical averages.  Of course, as with many measures, the most-often guessed expected future figure is today’s number. Read more

The ISM manufacturing index figure on Monday was certainly a disappointment, as it fell from May’s 53.5 down to 49.7—certainly larger than expected and below the critical ‘50’ mid-line of the diffusion index.  This is now at its weakest point since the summer of 2009.  Most of the components in the index were individually poor, with the new orders, production and export orders pieces all significantly down.  The employment measure was flat, however, and represented one bright spot in an otherwise dreary report, and the prices paid piece was also down—a good thing in this case—as commodity input costs fell, providing less of headwind for manufacturers.  Also, the level of the index itself, at around 50, is not especially low from a historical standpoint, is on par with about where we are at below 2% GDP growth is nowhere near recession levels. Read more

The Federal Reserve Open Market Committee ended their meeting last week with little new news.  Target rates, at zero to roughly a quarter of a percent, can’t be forced any lower, and, therefore, aren’t as effective at further economic stimulation as they once were.  What the Fed can do (and is doing) is extending ‘Operation Twist,’ which sounds convoluted, but consists of buying long Treasuries back with proceeds gained from selling shorter Treasuries (about $270 billion worth).  The point is to lower interest rates at specific areas on the yield curve where they’ll end up doing the most good—home mortgages, auto loans and capital loans for business equipment tend to fall in the intermediate range, so lower rates here are most stimulative to the economy. Read more