1. Issue 13, Volu me 4 / Janua ry 27, 2012
The FOMC Keeps the Momentum Going The Week Ahead -> The “Keys”
Tim McLaughlin - Housing and Employment Data Highlight the Week
Now that the dust has settled on the Fed's directive
announced last Wednesday in their statement, we want to Date Economic Release Prediction Last
reiterate several themes. Without a doubt, this is an uber-
dovish statement from the Fed. 1/30 Personal Income 0.4% 0.1%
First, the extended period language was moved out 1/30 Personal Spending 0.1% 0.1%
significantly with the first rate hike targeted for late 2014 or
later. Granted, this could be pulled back closer over time, but 1/30 PCE Core (MoM) 0.1% 0.1%
this is the projection as of today.
1/30 PCE Core (YoY) 1.7% 1.7%
Second, Bernanke made it clear that the guidance 1/30 Dallas Fed Manufacturing - -3.0
sentence, which is decided by the FOMC voters, dominates
the projections, which comes from the whole committee. In 1/31 S&P/CS Home Price Index - 140.3
other words, the alternate projections, which reference
potential hikes in 2012 and/or 2013, should be discounted, 1/31 S&P/CS 20 City (MoM) -0.40% -0.62%
as they are dominated by non-voting hawks.
1/31 S&P/CS 20 City (YoY) -3.21% -3.40%
Third, the FOMC has quietly raised its inflation target.
1/31 Chicago Purchasing Mgrs 63.0 62.2
Just five years ago the discussion was about a 1 to 2%
range, and then it moved to 1 1/2 to 2%, then 1.7 to 2% and 1/31 Consumer Confidence 68.0 64.5
now simply 2%. Clearly the Fed is worried about running a
low target because it means that during recessions there is a 2/1 MBA Mortgage Applications - -5.0%
greater risk of either going into deflation or hitting the zero
lower bound on interest rates. Hence, create a bigger 2/1 ADP Employment Change 185K 325K
cushion gives more room for fluctuation.
2/1 Domestic Vehicle Sales 10.50M 10.45M
Fourth, the Fed has implicitly changed the weights in its 2/1 Total Vehicle Sales 13.60M 13.48M
"Taylor Rule". By law the Fed is supposed to put equal
weight on unemployment and inflation, but since Volcker 2/2 Initial Jobless Claims - 377K
came in the implicit sense was that inflation had a bit more
weight. This does not mean the Fed has given up on 2/2 Continuing Claims - 3554K
controlling inflation, but, rather, it does mean on the margin
they accept bigger cyclical swings in inflation. 2/3 Nonfarm Payroll 148K 200K
2/3 Private Payroll 174K 212K
Takeaways: All of this suggests:
(1) The first rate hike will come even later 2/3 Manufacturing Payroll 10K 23K
(2) Even stronger odds of QE3 (focused on MBS given Fed's
focus on housing) after the “Twist” is over and if growth 2/3 Unemployment Rate 8.5% 8.5%
weakens as most expect
(3) Somewhat higher inflation and inflation expectations 2/3 Avg Hourly Earnings (MoM) 0.2% 0.2%
(4) More inflation volatility
2/3 Avg Hourly Earnings (YoY) - 2.1%
(5) Accommodations to support the broader economy,
lending (and housing as a bi-product) and investment 2/3 Avg Weekly Hours 34.4 34.4
(corporate and otherwise).
2/3 Underemployment Rate - 15.2%
All in all, more positive news to support the market in 2012.
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