Third-quarter growth was really 2.7 not 3.9?
Four at Four: Fed Frags the Dollar
Posted by David Gaffen
The dollar has suffered against the pound and euro. (Yahoo Finance)
People talk about the Federal Reserve being a slave to the markets, but it’s not markets, it’s just “market,” that being the equity market. Like a politician that promises everything to some and little to others, the market the Fed continues to brush off is the currency market, where the dollar continued to weaken after the Fed both cut interest rates and warned of more inflation, only increasing the jitters among those looking for higher-yielding assets elsewhere. Ashraf Laidi, chief foreign exchange analyst at CMC Markets, points out that the U.S. now has the same central-bank reserve rate as Canada, and continues to lose its higher-yielding advantage against all but the Swiss and Japanese. Others agreed. “All in all seems like the interest-rate differentials will continue to widen and the U.S. will be on the losing end of it,” says Camilla Sutton, currency strategist at Scotia Capital. And Fil Zucchi of Minyanville.com concludes that the Fed’s inattention to the dollar’s weakness will doom it eventually. “In my humble opinion the odds of a dollar crisis are growing faster than Boom Boom can drop Benjis on the economy, and the rest of the world is voting with its feet as to what they think of his policies,” he writes.
Of course, the reaction out of the equity market wasn’t all that bewildering. After all, allow a six-year-old child to eat all of his Halloween candy, and one can’t be blamed when he’s bouncing off the walls a few hours later. After all, the stock market got what it wanted, which was its candy, as the Fed apparently was swayed by the market’s expectations, which basically amount to worrying that something worse was going to happen (even with stocks near record highs and oil closing in on $95 a barrel, but never mind all that). “There have been numerous recessions and market crashes caused by credit going from being too loose to too tight,” notes Charles Rotblut, chief strategist at Zacks Investment Research. Fear was enough — the Fed fearing the markets. So the Dow industrials finished 136 points higher, a gain of about 50 points from the pre-Fed rally, as investors gobbled up whatever they could by taking the “it’s all good” approach to analysis of the Fed statement. That is to say, the economy is doing well but could slow, which is still good, because more rate cuts! And if not, no worries, hey, look, candy.
Homebuilders reacted badly to the Fed.
Which is to say, there’s one sector that did not react well to today’s release. The homebuilders, measured by the SPDR S&P Homebuilders ETF, dropped like a stone at the release, tag-teamed by the mention of the slowing housing economy and the potential for rising inflation, both of which mean bad things for the industry. The index finished down 3% today, and picked up speed as it rolled downhill. Rising inflation reduces consumption and worsens the outlook for home sales (no matter what the National Association of Realtors is saying in radio commercials) and also leaves open the possibility that the Fed is indeed finished with action for a while, which would seem to limit the likelihood that bank lending rates will decline further (not that banks are going to be easing lending standards anytime soon). “The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction,” the Fed said. No kidding.
Sources as disparate as Tony Crescenzi, chief bond market strategist at Miller Tabak, and John Williams, who runs the Shadow Government Statistics Web site, called shenanigans on today’s advance third-quarter GDP report because of a sharp decline in the annualized inflation indicators present in the report. “The nominal (not adjusted for inflation) numbers tell a different story. There, annualized third-quarter growth slowed to 4.67% from 6.56% in the third quarter,” writes Mr. Williams. “The reason that “real” growth increased is that annualized inflation, as reflected by the GDP deflator, sank to 0.77% in the third quarter from 2.64% in the second quarter.” Mr. Crescenzi notes that the deflator grew at its slowest pace since 1963, way off the consensus for 2% — which would have reduced growth to 2.7%, rather than the 3.9% reported by the Bureau of Labor Statistics. |
