Thursday, February 21, 2013
This morning’s data about inflation and the labor market will likely do little to ease the market’s concerns about potential changes to the Fed’s easy-money policy. We also have negative looking data out of Europe today, showing that the recessionary trend in the region’s economy may have carried into the first quarter of 2013.
None of this data means that the forces that gave us the strong stock market gains over the last three months have reversed course. And even though Fed policy has been central to the market’s recent gains, I don’t envision any imminent changes to the Fed’s actions any time soon. Investors are just looking for an opportunity to take some profits off the table.
The February Euro-zone PMI data from Markit this morning is problematic because it shows that the region’s economy will be unlikely to come out of a recession in the current quarter – the fourth quarter in a row that the Euro-zone economy has been in negative territory. Yes, Europe has not been a growth leader for the world economy for quite a while, but continued economic troubles in the region nevertheless have consequences. A continued Euro-zone recession is not only a headwind for the emerging economies, particularly China, but it also limits the region’s ability to come to grips with its fiscal problems. The Markit data confirms that the outlook for Germany may not be that bad, but we can’t say the same about France – the second largest economy in the currency bloc.
On the home front, the initial Jobless Claims data reversed the sharp gains from the week before, up by 20K to 362K. The 4-weeek average rose to 361K from 353K, essentially going back to the trend line where we started the year. This week’s data corresponds with the survey period for the February non-farm payroll report, which will likely be distorted by East Coast snow storms. Other data showed that inflationary pressures were tame, though the recent uptrend in gasoline prices will likely show up in next month’s ‘headline’ CPI numbers. Overall though inflation doesn’t appear to be anywhere near problematic territory for the Fed.
I don’t subscribe the view that the Fed is getting ready to change its monetary policy any time soon. But the whiff of change as indicated by Wednesday’s Fed minutes has everybody on edge. This goes on to tell you how much fuel the Fed’s current bond purchase program is providing to the market. I have all along believed that the market’s momentum was Fed inspired, but I am not sold on the idea that Fed was getting ready to change. That said, any change in the Fed policy will represent confidence in the economy’s internals and will be a bullish sign for someone like me.
Director of Research