Experts Talk FOMC Outlook, Dollar, Housing Starts, PPI
Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Jan. 20.
Kim Rupert and Michael Wallace, Action Economics
The Federal Open Market Committee meets next week on Tuesday and Wednesday [Jan. 26 and 27], the first meeting of the new decade. There's still some concern over a possible lame-duck [status for Ben] Bernanke, as Congress has delayed his confirmation for a second term as Fed chairman, though a vote could be taken on Friday [Jan. 22]. Of course there will be considerable market chatter regarding the FOMC's exit strategy, especially as China has started to go down that path.
We don't expect to read anything new out of policymakers next week, however—most of their comments have remained quite dovish given the weakness in the labor market and still-tight credit conditions that threaten to leave the recovery anemic. But we do believe the Fed will indicate it will let its asset-purchase program expire at quarter's end.
Meanwhile, we get four new voting presidents this year, with the hawkish [Kansas City Fed President Thomas] Hoenig and [St. Louis Fed President James] Bullard, the moderate [Cleveland Fed President Sandra] Pianalto, and dovish [Boston Fed President Eric] Rosengren taking over for hawk [Richmond Fed President Jeffrey] Lacker, moderates [Atlanta Fed President Dennis] Lockart and [Chicago Fed President Charles] Evans, and dovish [San Francisco Fed President] Janet Yellen.
With hawks, moderates and doves essentially replacing each other one-for-one (Bullard has taken on a more pragmatic approach in recent months), there may not be any near-term impact on the policy stance. However, Hoenig has dissented four times, always against easings, and he might surprise the markets with a vote against the accommodative stance of the consensus sooner than many would expect.
Vassili Serebriakov, Wells Fargo Bank
The U.S. dollar is stronger as two main themes continue driving the currency market. First, signs that China is moving further on the monetary-policy-tightening path are stirring fears about the sustainability of global economic recovery. Consequently, equity markets are coming under pressure, which is supporting safe haven demand for the dollar and the Japanese yen.
Second, continued euro zone fiscal troubles, along with hints of weaker economic data, are leading to some standalone weakness in the euro. The euro's latest moves are also significant from the technical perspective: For example, the euro/dollar pair is trading below its 200-day moving average for the first time since May 2009.
While we still do not believe that Greece or any other country will leave the euro, recent euro zone developments are arguably a key stress test for the fiscal, monetary, and political framework between the European countries. In that context, we remain bearish on the euro, both against the U.S. dollar and regional counterparts such as the British pound.
David Yan, Credit Suisse
At the beginning of 2009, who would have thought one of the best performing sectors of all was high yield—both loans and bonds—and CLOs [collateralized loans]? According to Credit Suisse indices, in 2009, U.S. high yield bonds returned 54.2% while U.S. leveraged loans returned 44.9%. The "great return" of the high yield markets caught almost everybody by surprise. And here we go again: At the dawn of a new year, dusting off our "crystal ball," we try to make projections for 2010—the year right after the worst global financial crisis (the "Great Recession") since the Great Depression. Yet we are also in uncharted territory in many regards.
Indeed, the level of uncertainties is unprecedented. When will the central banks extract the massive liquidity and stimulus? How robust will the economic recovery be or are we heading back to a double-dip recession? Will there be a trade war between the U.S. and China and a revival of protectionism? What will the legislative reform on the financial system look like and will it cause more damage than good? The list could go on and on…
The risk of rising interest rates, especially at the long end, makes U.S. Treasuries, agencies, and investment-grade corporate bonds less attractive for the duration risk and lack of sufficient carry; constrained by a subdued economic recovery with a high unemployment rate, the top-line revenue growth rate might limit the further upside of the stock market—especially given a very impressive rally of 2009 and currently a not-so-cheap valuation.
Michelle Meyer, Barclays Capital
Housing starts edged down by 4% to 557,000 [in December], close to our expectation of 560,000, but below the consensus forecast of 572,000. Overall, we believe today's housing starts report is consistent with our view that home construction is on an uptrend. Builders are still cautious, as suggested by the depressed [National Association of Home Builders] housing index, but are planning to increase construction gradually, given very lean inventories. The speed by which builders increase housing starts is a function of the recovery in new home sales, which until now have been sluggish.
The combination of foreclosures and the first-time homebuyer tax credit has seemingly shifted demand toward existing homes and away from new construction. However, we expect new home sales to pick up modestly during the spring selling season and continue to trend higher as the overall recovery in the economy picks up speed.
David Greenlaw, Morgan Stanley
No major surprises in the December producer price index report. The rise in food prices was larger than anticipated and the drop in quotes for energy was a bit less than expected. Meanwhile, the core [excluding food and energy] was held back by a pullback in light truck prices. But the core, excluding motor vehicles, was +0.1%—right in line with the recent trend.
The PPI measurement of motor vehicle prices appears to be entirely disconnected from reality. Over the past several years, the motor vehicle component has consistently registered wide swings from month-to-month even when there is no sign of any meaningful movement in the underlying trend. We're unsure whether the problem in the PPI measure of motor vehicle prices is attributable to sampling difficulties or some other methodological issue, but it is clearly a source of distortion in the monthly results that should be ignored.
Price readings for most capital equipment and consumer good categories were little changed in December. In fact, the only item (other than light trucks) that really stands out is a 3.6% spike in jewelry prices—obviously a response to the recent elevation in precious metal prices.