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Economic Monitor – Weekly Commentary by Dr. Scott Brown
The Federal Reserve Outlook November 2 – 6, 2009
The advance estimate of third quarter GDP growth provided conclusive evidence that the recession is over. However, the recovery is still expected to be gradual, fragile, and insufficient in the near term to generate much improvement in labor market conditions.
We arrived in San Francisco around noon last Monday. After a quick lunch with friends in Atherton, followed by another short visit with more friends in Los Altos, Cheryl and I pulled up to the hotel De Anza in San Jose (a wonderfully refurbished 1920s hotel with a great Italian
Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The economic data were mixed. The Institute for Supply Manufacturing’s (ISM) Manufacturing Index rose to 55.7 in October – compared to 52.6 in September – with the employment gauge crossing above the breakeven level for the first time since the recession began. On the other hand, the ISM Non-Manufacturing Index disappointed, edging down to 50.6 in October – compared to 50.9 in September – and reflecting a faster pace of job losses. Unit motor vehicle sales rose to a 10.4 million seasonally adjusted annual rate in October, vs. a 9.2 million rate in September and a 14.1 million rate in August.
The October Employment Report disappointed. The unemployment rate jumped to 10.2% (from 9.8%), but most of that surge was in teenagers (from 25.9% to 27.6%) and young adults (from 14.9% to 15.6%), which could reflect problems with the seasonal adjustment – or perhaps state budget strains are limiting the number of seasonal jobs available. Nonfarm payrolls fell by 190,000 (the median forecast was -175,000), but figures for August and September were revised a net 91,000 higher. Job losses have moderated considerably since the beginning of the year – payrolls averaged more than a 691,000 monthly decline in the first quarter compared to an average monthly decline of 188,000 over the last three months – and have become more concentrated within industries (in manufacturing: machinery, nonmetallic minerals, computer products, printing; and in retail: sporting goods, book stores, department stores). Jobs in temporary help services rose for the third consecutive month, positing the first significant increase since the recession began (an encouraging sign). Productivity growth, which is typically a precursor of new hiring, surged again in the third quarter.
The Federal Open Market Committee (FOMC) left short-term interest rates unchanged – no surprise – and gave some indication of what it will take for the Fed to tighten policy. The FOMC said in a statement that it “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The Fed indicated that information gathered since the last policy meeting suggested that “economic activity has continued to pick up.”
Next week, there is a thin economic calendar. The bond market will be closed on Wednesday, and face Treasury supply otherwise. Friday’s trade data (for September) have some implications for third quarter 2009 gross domestic product (GDP) revisions, but are unlikely to move the markets. The following week will be more eventful.
Indices
Last
Last Week
YTD return %
DJIA
10005.96
9962.58
14.01%
NASDAQ
2105.32
2097.55
33.50%
S&P 500
1066.63
1066.11
18.09%
MSCI EAFE
1545.48
1548.82
24.90%
Russell 2000
581.15
580.22
16.36%
Consumer Money Rates
Last
1-year ago
Prime Rate
3.25
4.00
Fed Funds
0.25
1.00
30-year mortgage
5.22
6.03
Currencies
Last
1-year ago
Dollars per British Pound
1.658
1.603
Dollars per Euro
1.486
1.300
Japanese Yen per Dollar
90.590
98.980
Canadian Dollars per Dollar
1.064
1.160
Mexican Peso per Dollar
13.362
12.675
Commodities
Last
1-year ago
Crude Oil
79.62
65.30
Gold
1089.10
741.83
Bond Rates
Last
1-month ago
2-year treasury
0.85
0.94
10-year treasury
3.5
3.28
10-year municipal (TEY)
5.17
4.46
Treasury Yield Curve – 11/06/2009
S&P Sector Performance Charts – 11/06/2009
Economic Calendar
November 9
—
Treasury Note Auction (3-year notes)
November 10
—
Treasury Note Auction (10-year notes)
November 11
—
Veteran's Day (bond market closed)
November 12
—
Jobless Claims (week ending November 7)
November 13
—
Import Prices (October)
Trade Balance (September)
November 16
—
Retail Sales (October)
Ben Bernanke Speaks
December 15/16
—
FOMC Meeting
Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Investing involves risk and investors may incur a profit or a loss.
US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.
Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.
Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
Material prepared by Raymond James for use by its financial advisors.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business November 6th, 2009.
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