With Fed head honcho Janet Yellen set to deliver her semi-annual testimony on monetary policy to the House and Senate over the next couple of days, the slightest bit of caution has crept into the stock market at the start of the new week, following record highs set on Friday.
By Peter Martin
Monday, February 23, 2015
By early afternoon in New York, the Dow Jones had dipped 42 points or 0.23% to 18,098, while the S&P 500 was down just 0.17% at 2106.7.
The market will be looking for clarity from Ms. Yellen, after last week’s release of minutes from the most recent FOMC meeting revealed a certain amount of discord amongst Fed officials over how and when to proceed in normalizing monetary policy. The Fed has made great strides in recent years in increasing transparency, with an increased emphasis on forward guidance, but the message appears a little muddled right now, with the minutes showing some committee members worried over how to communicate the prospect of policy tightening when inflation is so low. Many officials were apparently concerned that a hasty rate hike might stifle the recovery. Others were troubled by the risk of delaying the decision to tighten and that doing so could be interpreted as a signal that overly accommodative policy would prevail in the future.
In terms of the latest gauges of the economy, the message also looks a little mixed. The Chicago Fed released its National Activity Index for January today, which showed an improvement to a level of 0.13, following on from December’s reading of -0.07. Because the index is constructed to have a mean level of zero and economic activity is disposed to growth over time, any readings above zero are taken as indicating above-trend rates of growth. The three-month moving average for the index is little-changed at a strong 0.33, following 0.34 in December, suggesting overall economic activity remains healthy.
Looking specifically at the housing market, things do not look so rosy though. The National Association of Realtors said today that existing home sales dropped 4.9% in January to an annualized rate of 4.82 million units, its lowest level in nine months. The decline comes despite low mortgage rates and a burgeoning jobs market. The strength in the economy should support stronger buyer demand, which makes the sharp decline a little baffling. There will be plenty more housing data following this week, though, with the Case-Shiller home price index due on Tuesday, new homes sales on Wednesday, the FHFA house price index on Thursday and pending home sales on Friday.
Overall it is set to be a busy week for economic data, with February’s consumer confidence index released on Tuesday, January CPI on Thursday and revised Q4 GDP data at the end of the week. The CPI report could prove especially interesting, given the qualms noted in the Fed minutes over low inflation. Consumer prices slid 0.4% at the headline level in December and a further 0.6% is expected for January. With inflation not just below target but still dropping, it undermines arguments from the hawks at the Fed that policy should be tightened.
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