As expected, the Fed decided not to make any significant changes to its policies last week, keeping the interest rate at virtually zero. Additionally, the Fed announced the continuation of its Treasury buyback program, set to end in October, while deciding to slow down the pace of purchasing agency debt and mortgage backed securities – now set to be completed in March of 2010, rather than by year’s end as originally planned.
While acknowledging improvements in the financial markets and the housing sector, the FOMC statement sounded more cautious regarding consumer spending. No wonder – the consumer is being constrained by ongoing job losses, little income growth, lower household wealth and tight credit.
The fact that the Federal Reserve intends to keep interest rates at the lowest level possible for an indefinite amount of time is another indication that the economy is still very fragile. We are concerned that the Fed doesn’t appear to have any exit strategy in place as inflation potentially could come on very quickly, brought in big part by the loose monetary policy implemented around the world.
Oil ended last week at about $66 per barrel, falling over 8 percent last week. This was the largest weekly drop in two months, pointing to still weak energy demand and again confirming that recovery isn’t going to happen overnight. The bond market, meanwhile, continued to rally, signaling that its take on the economy is that of more caution.
The S&P/Case-Shiller home price index, which measures housing prices in 20 major U.S. cities, showed that in July home prices climbed 1.2 percent sequentially, the largest monthly gain in more than three years. The year-over-year decline was more than 13 percent, but better than forecasted and the smallest yearly decline since early 2008. However, to put the numbers in context, housing prices have been falling on a year-over-year every month since the beginning of 2007.
In recent days, we’ve seen a pickup in merger activity. Among some of the headliners, Xerox acquired Affiliated Computer Services for $6.4 billion, Abbot Laboratories will buy Belgian chemical company Solvay’s pharmaceutical business, and Johnson & Johnson bought an 18 percent stake in Crucell, a Dutch biotech company. The activity is picking up from near-zero levels, but the market is taking in the M&A news as a positive sign.
On the negative side, consumer confidence unexpectedly slipped in September, reversing the last month’s gains, according to the Conference Board. The consumer confidence index was expected to go up to 57, slightly below last year’s average. Instead, the index retreated to 53.1, down from 54 in August. Those surveyed reported being more apprehensive about current economic conditions; fewer people expected business conditions to improve in the next six months, compared to last month’s readings.
With the holiday season around the corner, retailers are hoping that their lackluster sales could get a boost. They are likely to be disappointed with majority of Americans becoming stingier and 14.5 million still officially unemployed as of the last month.
