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U.S. Fed makes only minor changes to its characterization of the economy implying no imminent shift in the direction of policy
March 16, 2010
The statement issued by the Fed at the conclusion of today’s policy-setting FOMC meeting was very much in line with expectations and flags no imminent shift in policy. It suggested a very modest upgrade to its characterization of economic growth; however, this did not alter the assessment that inflation “is likely to be subdued for some time.” As a result, the central bank indicated that the Fed funds would remain in its current target range of 0% to 1/4% “for an extended period.” Fed President Hoenig dissented once again to this phrase, as he did in January, arguing that it was no longer warranted and “could lead to the buildup of financial imbalances.”
The slight upgrade to the characterization of the economy was conveyed in a number of revisions to the text from January. For example, the Fed suggested that “the labour market is stabilizing” in contrast to the comment that the deterioration is abating. As well, business spending on equipment and software was characterized as rising significantly as opposed to the characterization in January that it appeared to be picking up. In contrast, however, housing starts were characterized as “flat at depressed levels” following no mention of residential investment in January.
The remainder of the statement provided updates on the winding down of the central bank’s other initiatives to provide stimulus to the economy. The MBS and agency debt purchase programs were characterized as “nearing completion” with the remaining transactions to be completed by the end of March. In terms of the various liquidity facilities opened up during the height of the crisis, the central bank indicated that it has been in a large part closed down “in light of improved functioning of financial markets.”
Today’s statement represents a slightly more upbeat assessment of the growth outlook, although there was nothing significant enough to alter a still benign characterization of inflation. As the growth outlook continues to improve, policy will at some point need to be tightened via higher interest rates although no such move appears to be imminent. The only near-term nod toward greater restraint is the comment that asset purchases will for the most part be complete by the end of this month. There was no indication when the central bank may start to shrink the size in its balance sheet by the eventual selling of these assets. Our current forecast assumes that any hikes to the Fed funds are not likely until the end of this year.
Paul Ferley, Assistant Chief Economist, RBC Economics
Canadian January manufacturing sales rose stronger than expected, further building on December’s surge
Manufacturing sales in January rose a much stronger than expected 2.4% on a month over month basis. Expectations going into the report were for a more modest 0.6% rise in the month. The solid increase occurred on top of an already strong 1.9% gain in December (which was revised up from the previously estimated 1.6% gain). Manufacturing sales have now increased for five-consecutive months. Eliminating the effect of price changes does little to alter a picture of strength. The volume of manufacturing sales rose 2.2%, which matched the surge recorded in December. This measure has also now increased for five-consecutive quarters with activity now at its highest level since November 2008.
The solid gain in manufacturing sales reflected broad-based strength with 17 of 21 sub-components showing increases in the month. The overall increase was led by primary metal manufacturers, which had activity rising 8.5%. StatsCan commented that activity has been steadily improving since July 2008 coinciding with a recovery in both United States and global growth. Solid gains were also recorded in the rubber and plastic (5.6%) and petroleum and coal (3.4%) components. These gains offset an expected decline in the aerospace component of 3.4%, which had surged 28.5% in December. The motor vehicle component rose a disappointing 0.9% in the month.
In terms of other component in the report, inventories were unchanged in the month. Given the strong gain in sales, the inventory-to-sales ratio for January dropped to 1.33 from 1.36 in December. StatsCan commented that this is the lowest level of this ratio since September 2008 and consistent with conditions prior to the onset of the financial market turmoil. Unfilled orders order rose 0.4% while new orders were up 0.2%. British Columbia, Quebec and Ontario led the strength in manufacturing sales.
The increase in the volume of manufacturing sales bodes well for the first-quarter 2010 GDP report to show that the economy continues to expand going into 2010. Although we do not expect that the pace of growth will be maintained at the 5.0% recorded in the fourth quarter of 2009, activity in the first quarter of 2010 is expected to rise a solid 3.8%. Because this pace of growth is confirmed by upcoming indicators, the Bank of Canada will need to turn to withdrawing some of the monetary stimulus currently in the system; however, the continuing high, though moderating, unemployment rate is expected to keep inflation low, which will allow any tightening to be undertaken at a gradual pace. Our forecast assumes that the overnight rate will be maintained at 0.25% until the end of the second quarter. After that, we expect that this rate will rise to 1.25% by the end of 2010 (and to 3.50% by the end of 2011).
Paul Ferley, Assistant Chief Economist, RBC Economics
U.S. housing starts retreat in February
Housing starts dropped 5.9% to an annualized 575,000 from a revised 611,000 in January (earlier reported at 591,000). Expectations were for starts to come in at 570,000 units. Permits continued to slow, following January’s 4.7% decline, with a 1.6% fall to 612,000 units.
Starts of both single-detached homes and multiple-units fell in February. Single-unit starts came in at 499,000 (-0.6%) while multiple-units plunged to 76,000 (-30.3%). Large gains were seen in the Midwest (+10.6%) and the West (+7.9%), while starts dropped substantially in the South (-15.5%) and the Northeast (-9.6%).
As with most U.S. economic releases for February, the bottom line was likely affected by adverse weather in the early part of the month, in this case shown by the steep drop off in housing starts in the Northeast region. With that said, housing-market activity remains at historically low levels, and yesterday the homebuilders' association reported an unexpected deterioration in builder confidence in March, with the index falling to its lowest level in a year. The decline was reported to reflect the lack of available credit for new projects, the large number of distressed properties for sale and the continuing hesitancy of potential buyers due to the weak job market.
With this in mind, the Fed will likely keep monetary conditions accommodative, which should stimulate demand for housing going forward, and we expect that the Fed funds will remain in the current range of 0.00% to 0.25% until late 2010, especially given that the Federal Reserve committed to cease its purchases of mortgage-backed securities at the end of this month and the first-time homebuyers’ tax credit is set to expire next month.
David Onyett-Jeffries, Economist, RBC Economics
To view charts of today's data, go to
http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada)
http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)
RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Nathan Janzen,
Economist
David Onyett-Jeffries, Economist
Go to Financial Markets Daily (pdf) for a daily summary of North American interest rates and foreign exchange rates.
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