What’s App-ening

Ahead for most of the morning and flat at the 2:00 (EST) release of the minutes of the Fed’s January 28-29 policy meeting, the Dow Jones Industrial Average drifted lower over the final two hours of trading, closing Wednesday down 0.6% at 16041. The S&P 500 traced a similar pattern, ending down 0.7%, while NASDAQ spent most of the day trading in negative territory and ended 0.8% lower than Tuesday’s 13-year high. Judging by the timeline, investors were mildly disappointed at what MarketWatch described as the “fractious debate on policy” at last month’s FOMC meeting revealed in the meeting minutes. It probably didn’t help stocks when the IMF warned of emerging market risks in 2014. (Facebook shares, up 1% during regular trading, declined more than 2% after hours on news of its acquisition of WhatsApp, the smartphone messaging app, for the astounding sum of $19 billion in cash and stock.)

Among policy dissenters at the January FOMC meeting were those who thought the economy too weak to continue to taper bond buying and others who felt the Fed might need to raise its target for short-term interest rates as soon as this year. Fed officials were doubtful that the 3.7% GDP growth rate of the second half of 2013 could be sustained, and staff economic expectations were revised lower with respect to the U.S. economy’s longer-term growth potential. Nonetheless, the staff outlook was for better-than-2013 (and better-than-potential) GDP growth over the next few years. Why? Because of relatively easy Fed policy; reduced fiscal drag; increased business and consumer confidence; further improvements in credit availability and financial conditions; and improved foreign economic growth. This generally positive outlook, in our view, and the intention to continue to taper in a steady way, were the main takeaways from last month’s meeting minutes.

Housing starts declined 16% in January, three times as much as the Street was projecting. The fact that housing starts in the storm-impacted Midwest were down 75% over the two-month November-January span suggests that weather was a big factor in the last couple of months’ declines in national housing activity. Investors appear to believe as much, since stock prices rose following this morning’s release of the housing starts and building permits data; it was hours later when stock prices turned soft, particularly after the FOMC meeting minutes were released at 2:00.

The Bureau of Labor Statistics unveiled its new Producer Price Index – Final Demand-Intermediate Demand series of inflation indexes today, revamping an old PPI that was increasingly in danger of slipping into irrelevance. The new PPI–FD-ID, which is roughly twice as broad as the old one, measures price changes from the perspective of the seller, as opposed to the CPI, which measures prices from the buyer’s perspective. Like the CPI, the new PPI–FD-ID gives weight to the services economy, along with construction, government and exports, in addition to goods – as compared with the old PPI’s heavy focus on prices of goods in the crude, intermediate and final stages of processing. The year-over-year change in the new PPI – FD-ID, which appears to be less volatile than the old PPI, was 1.2% in January; ex food and energy, the 12-month change in producer prices was 1.3%. Time will tell whether, from the perspective of the investor, the new PPI is any more relevant than the old PPI.

Bonds started the day stronger, but prices retreated after the FOMC meeting minutes were released. The 10-year Treasury note yield rose three basis points Wednesday, and yields were generally higher by that much or a bit more across almost all of the yield curve, for nominal Treasurys and inflation-protected TIPS alike. Commodities prices were mostly higher today, especially natural gas futures prices, which increased 10% to $6.10 per million BTU, a five-year high. The dollar was a touch stronger today, while foreign stock prices and sovereign bond yields were not much changed.

Reports/dates/facts/links to watch for over the next week:

  1. February 20: Consumer price index for January; weekly unemployment claims; leading indicators for January; Philadelphia Fed survey for February.
  2. February 21: Existing home sales for January.

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

About wrightnetblogger

Senior Vice President – Investment Research/Economist
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