Probability of Federal Reserve increasing interest rates by 3/13 FOMC meeting

by 1/4%: 0%

by 1/2%: 0%

FEDERAL RESERVE VALUATION  

(click to see graph)

    Recent past and future forecasts:  [01/04/10 - At this point, we think it is likely that there will be more hedging required during 2010 to protect our 2009 and expected 2010 gains.]  This forecast became reality as we implemented hedge positions to reduce exposure to the market correction that developed during the 2nd quarter of 2010.  The year ended with a strong enough final quarter to net good inflation-adjusted results for the year.] [01/03/11 - We think that it is likely that the stock market will produce another year of good returns that will remain well above the inflation level for 2011.  This will occur in response to an improving economy coupled with a high level of attention that will be directed to reducing unsustainable government spending.] [01/03/12 - With early signs that our economy is on a recovery track, there is a better chance that the hoped for results in last year's forecast will move forward more successfully to enable stock investments to post decent returns by year-end with volatility continuing in response to European governments debt control actions and our domestic Presidential election process.]

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    The stock market received an unexpectedly good January jobs report with enthusiasm, as reflected in the +201.77 Dow, +19.36 S&P500, and +45.98 Nasdaq index point changes for the week.  The long-term treasury yield rose +0.02 to 1.92%.  New Nonfarm Employment grew by 243,000, which was twice what some anticipated.  The Unemployment Rate also declined -0.2 to 8.3%.  The Federal Reserve also noted signs of improvement in current economic activity before the House Budget Committee.  This week, more will come on the Federal Reserve's post January jobs report views before the Senate Budget Committee that surely will ask whether the Fed's long-term pledge regarding low interest rates might be rethought.

    However, just recently, 4th quarter Gross Domestic Product growth of +2.8% was less than the 3.2% that had been expected and a hoped for improvement in New Home Sales for December showed fewer homes were sold.  Initial Jobless claims have remained high with +367,000 reported last week.  But, other recent economic data have also suggested that our economy is improving.  The most important have been better than expected confidence and employment.

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    The focus of attention remains European efforts to agree on debt issues, with Greece still unable to come to terms on an agreement.  Euro-zone borrowing costs must continue to remain stable and not rise from current levels for the recent stock market advance to continue.  Recent bond auctions in Spain and Italy have been successful enough to enable the current in stock prices to occur.  Also, better than expected December jobs data, suggesting that our economy may be recovering more strongly than previously thought, has benefited the 2012 start for stock prices.  The European Central Bank has moved more aggressively to ease Europe's credit by loaning 523 billion in low interest loans to the region's banks.  The stock market had previously moved higher in early December on news that 26 of 27 European Union partners had agreed to closely integrate their fiscal policies.  Only the UK did not sign on.  Earlier, the stock market had risen in response to concerted joint central bank intervention to lower the cost of dollar loans to European banks, as China took action to ease its monetary policy.

    Last month, the Federal Reserve began its "transparent" reporting at January's meeting to set future monetary policy.  They announced there intention to hold near-zero at least into 2014.  This confirms their expectation for sluggish economic growth for an extended period.  The Federal Reserve has repeatedly expressed concern about slowing global growth and further strains in global financial markets.  The investment markets have been closely watching to see whether there would be any policy shift toward initiating action on additional stimulus measures.  Minutes of the Federal Reserve's recent meeting show that further stimulus is under consideration if conditions should worsen.  The concern cited is the risk that Europe's debt crisis would ignite a global recession that would cause a renewed recession to develop here.          

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   The first estimate of the 4th quarter's Gross Domestic Product showed growth at 2.8%, which was slower than the 3.2% consensus expectation.  The final revision of 3rd quarter Gross Domestic Product was -0.2% to +1.8%.  The previous estimate for the 3rd quarter's Gross Domestic Product was revised downward to +2.0%.  The first estimate of 3rd quarter Gross Domestic Product report showed growth accelerating to +2.5%.  The final report for 2nd quarter Gross Domestic Product was revised upward a little to +1.3%.  The previous report was revised downward from +1.35 to +1.0%.  The first report for the 2nd quarter's Gross Domestic Product was unexpectedly weak, rising just +1.3%, which was well below expectations.  The 1st quarter's final revision of Gross Domestic Product was revised downward from +1.9% to an unexpectedly weak +0.4%.  The final report on the 4th quarter's Gross Domestic Product was released showing growth revised upward to +3.1%.

    Last week's, January's employment data was much better than had been forecasted with 243,000 new jobs and the Unemployment Rate declining -0.2 to 8.3%.  December's employment data beat expectations with 200,000 new jobs reported and the Unemployment Rate declining to -0.2 to 8.5%.  November employment data report showed 120,000 new jobs were added with the Unemployment Rate dropping -0.4 to 8.6%.  Revisions were made to the September and October data, which were also positive.  October's employment data remained weak with just 75,000 new jobs and the Unemployment Rate falling -0.1 to 9.0%.  September's employment data, while still much less than needed, showed 103,000 jobs created with the Unemployment Rate remaining 9.15%.  Employment data for the month of August shocked the markets with no job growth as the continuing loss of government jobs totally offset a pathetically anemic 17,000 new jobs created in the private sector.  The Unemployment Rate continued at 9.1%.  The previous two months gains were also downwardly revised.  July's employment data release showed an above consensus +117,000 jobs were created with the Unemployment Rate declining to 9.1%.  However, we note that the gain still is not enough to cover the growth of new job seekers and does not take into account those who simply gave up looking for work.  June's employment data upset the markets with just +18,000 new jobs.  The Unemployment Rate also increased to 9.2%.  May's employment data came in far below expectations with only +54,000 new jobs.  The Unemployment Rate rose to 9.1%.  April's employment data came in well above expectations with a more healthy +244,000 new jobs.  April's rise in the Unemployment Rate to 9.0% was attributed to a rise in the number of people looking for work.  March's employment data was also stronger than expected, with +216,000 jobs created and the Unemployment Rate falling to 8.8%.  February's employment data came in near expected levels, with jobs rising +192,000 overall and an encouraging +220,000 gain in private sector jobs.  January's employment data had been expected to improve, but instead deteriorated to just +36,000 new jobs.

    December Housing Starts were down -4.1% to a 657,000 annual rate.  Housing Starts for November were up a much better than expected +9.3%.  Existing Home Sales also beat expectations rising 4.0%.  Housing Starts for October were reported to have fallen -2,000 to 628,000, which was better than had been forecasted.  September Housing Starts gained +85,000 to 658,000 while still weak was better than had been forecasted.  August New Housing Starts deteriorated to a paltry 571,000.  July's data showed a decline from June to +604,000.  June New Housing Starts were revised down to +613,000.  New Housing Starts for May were +560,000 was better than expected.  New Home Sales for April also surprised on the upside expanding +7.3%.  After a March rebound, it will be important for the markets to see further gains in the summer months ahead.  New Housing Starts for April declined much more than was expected to 523,000.  New Housing Starts for March rose +7.2% over February's level.  But, this was well below the level reported at this time last year.  Existing Home Sales also declined in April after having been reported to have increased +3.2% for March, but also were well below last year's level.  

    December data for Leading Indicators was up less than was forecasted at +0.4%.  The November Leading Indicators report was slightly better than the consensus up +0.5%.  October's Leading Indicators improved to +0.9%, which better than had been expected.  September Leading Indicators report was slightly less positive than forecasted, up +0.2%, but close enough to the consensus to negate significant market impact.  The August Leading Indicators report showed a very small slightly above consensus +0.3 gain.  July's release reported a +0.5% gain.  June's release showed some weakening from May down to an +0.3% increase for the month.  May's Leading Indicators report came in above analysts' +0.4% estimates and was up +0.8%.  The release of a negative -0.3% Leading Indicators report for April was damaging to market psychology.  March Leading Indicators were reported to be up +0.4%, which was higher than the consensus estimate.  February's Leading Indicators were reported to have risen +0.8% that was close to expectations.  January's Leading Indicators report rose just +0.1%, which was slightly below the consensus estimate.  December Leading Indicators report rose +1.0%, while not a large increase did, at least, come in above the consensus estimate.       

   Inflation remains a non-issue.  Last week, December's inflation data reported Producer Prices falling _0.1%, with "core" prices up +0.3%.  Consumer Prices were unchanged with "core" prices up +0.1%.  November's inflation data continued to be benign with Producer Prices up +0.3% and +0.1% for "core" prices.  Consumer Prices were unchanged, with "core" prices up +0.2%.  October inflation data showed Producer Prices falling -0.3%, with the "core" price flat and Consumer Prices down -0.1%, with "core" prices rising +0.1%.  Neither report indicates that inflation pressures are presently of any consequence.  September's inflation data had little impact since "core" rates remained contained.  Consumer Prices rose +0.8%, with "core" prices up +0.2%.  Producer Prices increased +0.3%, with "core" prices up just +0.1%.  The August data for inflation showed an increase in the Consumer Price Index decelerating to +0.4% with "core" prices rising +0.2%.  July inflation data indicated an uptick as Consumer Prices rose +0.5%, with "core" prices up +0.2%.  August Producer Prices were unchanged with the "core" rate up just +0.1%.  Producer Prices were up +0.2%, with "core" prices gaining to +0.4%.  The June inflation data showed Producer Prices falling -0.4%, with "core" prices up +0.3%, which was near expectations given the recent decline in energy prices.  Consumer Prices fell-0.2%, with "core" prices up 0.3%.  May's inflation data release causes some concern as both measures increased more than was forecasted.  Consumer Prices rose +0.2%, with "core" prices up +0.3% and Producer Prices rose +0.2%, with "core" prices also up +0.2%.  April's inflation data released showed some increase.  Consumer Prices rose +0.8%, with the "core" up +0.3%.  April Consumer Prices rose +0.4%, with "core" prices up +0.2%.  The March inflation data released earlier this month has caused some concern, because increasing energy and food prices pushed the Consumer Price Index up +0.5%.  Inflation without  food and energy being counted, the so-called "core" rate, rose +0.2%.  The Producer Price Index rose +0.7%, with the "core" rate up a tame +0.1%.  February's inflation data was higher than had been forecasted, with the Consumer Price Index up +0.5% (core +0.2%) and the Producer Price Index up +1.6% (core +0.2%) .  January's inflation data was released showing an uptick, with Producer Prices rising +0.8% (core prices +0.5%) and Consumer Prices rising +0.4% (core prices +0.2%).

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