The Canadian stock market finished slightly lower yesterday after the U.S. Federal Reserve (FOMC) announced it was leaving its key interest rate unchanged at 0.25% while stating that the economy is improving.
The Federal Reserve restated its intention to cease buying $1.25 trillion of mortgage-backed securities (the Central Bank is buying mortgages in an attempt to increase demand to buy existing mortgage debt in an attempt to keep mortgage rates low) in March. The Federal Open Market Committee said it “will continue to evaluate its purchases of securities in light of the evolving economic outlook” and the state of financial markets. It also maintained its pledge to keep interest rates near zero for an “extended period,” opening a division among policy or decision makers for the 1st time in a year.
Kansas City Fed President Thomas Hoenig dissented, saying the time had come to change the promise to keep rates low. The economy “has continued to strengthen although the pace of economic recovery is likely to be moderate for a time.”
The United States is signaling the U.S. domestic recovery is on the mend and they will continue monitoring conditions. It is clear that the Fed upgraded its assessment of the economy slightly since the last meeting, stressing that activity is strengthening and that the recovery looked to be moderate as opposed to weak as per their last statement in December.
The S&P/TSX composite index moved down 0.15% which was a marked improvement from earlier in the day. Commodity stocks again led the market lower as investors continued to react to moves by China to curb bank lending. The worry is that tighter monetary policy in China to reduce inflationary pressures could mute the limited global economic recovery around the world.
Stock markets have also been held back in recent days by U.S. President Barack Obama’s push to restrict trading by major financial institutions and concerns that Fed chairman Ben Bernanke might not be reappointed. Poor housing sales in the United States also provided more data and more concerns about the economy. The U.S. Commerce Department reported that new U.S. home sales unexpectedly fell 7.6% last month, capping the industry’s weakest year on record.
The base metals sector fell 3.44%, the gold sector fell 1.29%, the industrials sector lost 0.58%, the energy sector lost 0.6% and the technology sector was the main gainer with an advance of 1.27% in the “wake” of Apple Inc. unveiling a tablet-style computer that looks like a large iPhone. The financial sector also advanced by 0.72%.
In the United States stocks rose after the U.S. Federal Reserve said it will keep interest rates near zero and ahead of President Barack Obama’s State of the Union address last night.
Market analysts said the Fed’s decision was not surprising, but the somewhat more optimistic tone of its statement shifted sentiment after a wave of unexpected news from Washington the past two weeks caused the stock market to decline.
The Dow Jones industrial average gained 0.41%, the Standard & Poor’s 500 Index gained 0.49% and the Nasdaq Composite Index climbed gained 0.80%.
Boeing was the Dow’s top advancer, up 7.3% at $61.93 after the world’s 2nd largest aircraft manufacturer reported stronger-than-expected quarterly results and forecast a profitable 2010. However, other top constituents in the Dow like Caterpillar and United Technologies declined after giving cautious forecasts.
As mentioned, the Federal Reserve offered a guardedly upbeat view of the U.S. economy and renewed its pledge to keep interest rates near zero despite the objection of one policy maker. The decision to hold rates steady by the Fed’s policy-setting Open Market Committee was 9-1, with one dissenting because he wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for “an extended period.”
“Economic activity has continued to strengthen,” the panel said after a two-day meeting, a slight upgrade from a December statement that said activity had “continued to pick up.” It also described the pace of economic recovery as likely to be “moderate for a time,” having previously depicted the recovery as “likely to remain weak.” In short, this is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path.
In an effort to stem the worst financial crisis in generations and combat a deep recession, the U.S. central bank not only slashed interest rates but undertook a series of emergency actions to soothe ailing credit markets. Many of these actions, including bailouts of insurer American International Group (AIG) and other financial giants, have fueled taxpayer anger, endangering Fed Chairman Ben Bernanke’s nomination to a 2nd term at the central bank. Once expected to “sail through”, his confirmation vote ran into resistance last week, sending Wall Street, which strongly backs the chairman, sharply lower on Friday.
The economy resumed growing in the 3rd quarter of last year and most economists think it expanded at a rapid clip in the 4th quarter of last year. However, with the unemployment rate at 10%, housing prices still depressed, consumer spending is likely to remain “subdued”. The housing market, which was at the root of the recession that began in December 2007, has also shown signs of weakness lately.
Sales of newly built U.S. single-family homes fell unexpectedly in December as the bounce from an initial tax credit fizzled, the latest sign that the government-led housing recovery might be losing some steam. Mortgage applications also fell for the 1st time in a month last week as demand for home refinancing loans dropped sharply.
In short, the housing recovery is very fragile and investors will monitor further developments very closely. The housing market was the main catalyst of the most painful downturn in 70 years and renewed weakness could further “hobble” the economic recovery. Investment in new homes contributed to growth in the 3rd quarter for the 1st time since 2005. In short, it is hard to imagine a scenario whereby the U.S. economy could grow without positive growth from the housing sector.
World stock markets moved up this morning after the U.S. Federal Reserve indicated that interest rates would not rise soon. President Barack Obama’s focus on the economy in his first state of the union speech and a seemingly less hostile attitude to the banks in the speech also helped stocks to rally in Asia and Europe and lift expectations about the Wall Street open by about 0.20% to 0.50%. Stocks around the world had been in retreat for most of the last week in the wake of Obama’s announcement that he plans to impose restrictions on banks more risky trading activities as well as mounting speculation that China is looking to rein in bank lending to prevent inflation. This morning investors appear less concerned.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
