Over the past few days, it seems the conversation is intensifying on whether the FOMC will shift monetary policy faster than previously expected. In my view, the conversation is extrapolating a rising equities market with the removal of easy monetary conditions. That is an incorrect view and does not represent the pure economic evidence which suggests the data is still “off target” with what the FOMC telegraphed with its December 2012 outcome based guidance.
Investors should view the rise in equity prices as confirmation that the global sea of liquidity is forcing investors into riskier assets, not that robust global growth is the catalyst. In fact data released in the past few days underscores that there remains a long runway to achieve the FOMC targets of 6.5% unemployment and 2.5% inflation. I agree with the premise that the targets need not actually print 6.5% or 2.5% for the Fed to shift policy; the trajectory toward those levels matter more. However, current trends are not firmly pointed in that direction just yet.
Last week’s economic data both domestically and globally on balance was consistent with the Fed’s view that “economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.” However, the Fed also directed within its January 30 statement “without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”
Lastly, the Fed is also challenged by the dramatic shift in monetary policy from Japan. Competitive currency devaluation is in high gear. The Fed must tread carefully as not to place the value of the U.S. dollar in an unwanted position of significant appreciation. The challenge the Fed faces from Japan will remain strong at least until a new Bank of Japan governor is appointed by April 8, when current BOJ Governor Masaaki Shirakawa’s term ends.
RECENT ECONOMIC DATA:
- Manufacturing PMI on January 31 mildly disappoints, falling to 50.4 from 50.6 last month, below consensus estimate of 51.0
- Non-Manufacturing PMI, on February 2 records 52.3, above last month’s 51.5 and above consensus estimate of 52.0
- Spain Manufacturing PMI rises to 46.1, above consensus estimate for 45.5
- Italy’s Manufacturing PMI records 47.8, above both last month’s 46.7 and consensus estimate for 47.4
- France’s Manufacturing PMI records 42.9, matching last month’s 42.9 and consensus estimate for 42.9; I continue to view France as the weak European link with the potential to create discourse once again in Europe
- Germany’s Manufacturing PMI records 49.8, above both last month’s 48.8 and consensus estimate for 48.8
- United Kingdom’s Manufacturing PMI records 50.8, below both last month’s 51.4 and consensus estimate for 51.0
- Nonfarm payrolls for January +157,000, below last month’s revised higher +196,000 (from +155,000) and consensus estimate of +165,000
- Private payrolls for January +166,000, below last month’s revised higher +202,000 (from +168,000) and consensus estimate of +168,000
- January Unemployment Rate rises to 7.9% from 7.8% as the labor participation rate remains at a multi-decade low at 63.6%
- ISM Manufacturing records at 53.1, well above last month’s revised lower 50.2 (from 50.7) and consensus estimate of 50.7
- ISM Manufacturing New Orders to Inventories gap falls to +2.3, somewhat tempering the overall enthusiasm surrounding the 53.1 headline print
- Inventories rose sharply to 51.0 from 43.0 in December
- New Orders also rose to 53.3 from 49.7 In December
- The gap at +2.3 is the smallest since September 2012’s +1.2, still positive, however, worth further monitoring
- University of Michigan Consumer Confidence rose to 73.8, above last month’s 71.3 and consensus estimate of 71.5. Consumers are feeling better. However, I suspect they are not feeling better about economic conditions but rather the elevated mood is attributed to a rising equities market. A rising equities market was not one of the Fed’s metrics for target guidance. Economic data remains “off target.”