This week, the Fed assured investors that QE III will remain in place for the time being, pressing forward with its monthly $85 billion injection into U.S. economy. A couple of months ago, investors began to worry that the Fed may start to scale back its asset purchasing program. However, this week we learned of the Fed’s plan that flexibility in either direction could transpire. With April’s unemployment report due this week, we could continue to see a case where bad news equates to positive stock gains and vice versa in the markets with the anticipation that the Fed will continue with its program as long as the economy remains in a funk. John Hilsenrath of The Wall Street Journal has further details on the Fed’s plan going forward:
The Federal Reserve said it would press forward with an $85 billion-a-month bond-buying program and hinted it might even dial it up if the job market or inflation figures fail to meet the Fed’s expectations.
The Wednesday pronouncement after a two-day policy meeting marked a shift in the U.S. central bank’s public tone.
In March, with U.S. labor markets apparently on the mend, central-bank officials started discussing how and when they might begin pulling back the bond programs.
But the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead.
U.S. inflation has moved noticeably below the Fed’s 2% goal, part of a global slowdown. This has taken pressure off the Fed and other central banks to pull back from their efforts to boost growth by pumping new money into the world economy.
This may potentially be good news for U.S. equity markets, as investors need to further undertake a certain amount of risk in order to see some return in this type of environment. Also, with inflation at levels that can be described as very calm, the Fed’s hand has not been forced to dial down its purchases. In the meantime, we may probably continue to expect low-yielding U.S. bonds and a stock market with further room to grow on the upside. What the long-term repercussions are of QE III may remain to be seen and continue to be strongly debated, but Chairman Bernanke is not coming off his position anytime soon.
Could a decrease in gasoline prices help offset the recent federal spending cuts? This year, prices surpassed the $3.80 mark, but have since dropped by 30 cents to reach a national average of $3.50 per gallon. Experts in the oil industry are also predicting that gas prices will continue to decrease, with prices below $3.40 this summer. With a cut in gas prices, Americans may then have more cash on hand to presumably spend. What type of impact could this have on the overall United States economy? Steve Hargreaves of CNNMoney has the details:
If the gas price drop continues — and many expect it will — prices could slip below $3.40 a gallon by summer, according to the research firm Capital Economics.
If prices stay that low, the savings for drivers over the course of a year could top $80 billion. That’s $80 billion to spend on other things like clothes, electronics or entertainment.
“To put that into context, it is roughly the same size as the sequestration spending cuts that took effect at the start of last month,” researchers at Capital Economics wrote in a recent note. As a result, economic growth “might not be as bad as we had initially feared.”
Many analysts have forecasted that 2nd quarter GDP growth may likely take a serious hit. This week, 1st quarter GDP growth for 2013 will be announced, and investors are bracing for a number around 3%. With spending cuts and hiring freezes being implemented, a drop in gas prices may probably be what U.S. economy needs right now to make amends for a loss in government spending. With crude oil supplies increasing and global demand decreasing, downward pressure may possibly continue to mount on the crude market this summer, which may potentially provide a major boost to U.S. economy.
As the U.S. stock market continues to sustain momentum with all-time highs and low volatility, global growth seems to be trending downward. In Asia, the days of 9% growth in China seem to be a thing of the past, at least for now. Analysts were expecting a rate of growth to come in at 8% for China’s 1st quarter GDP, factoring in a recent credit expansion by the government. Despite this loan enlargement, GDP numbers disappointed investors as they were reported at 7.7%. China’s slowdown has global ramifications, as countries around the globe are seeing their own growth forecasts being reduced for the remainder of this year and into 2014 as well. Bob Pisani of CNBC.com has more:
Still, 7.7 percent first-quarter gross domestic product is hardly a disaster, but you wouldn’t know it by the commentary from several analysts, including JPMorgan Chase, Nomura, and Mizuho, all of which lowered estimates for China economic growth. The main takeaway: 7 percent to 8 percent GDP growth is the new normal.
Even South Korea is being affected. Separately, Goldman Sachs cut its 2013 and 2014 GDP forecasts for South Korea.
The International Monetary Fund just cut the U.S. and global growth forecast. It now sees full-year U.S. growth at 1.9 percent versus a prior forecast of 2.1 percent in January. The IMF also cut its 2013 world growth estimate to 3.3 percent, down from its January expectation of 3.5 percent.
While expectations are being lowered around the globe, some sectors are rebounding quite well domestically. The U.S. housing market has had a rocky foundation since the recession of 2007-2008, but recently numerous data has arrived that shows continuous signs of a strengthening market. This week housing starts came in over one million new homes for the first time since 2008, while analysts were expecting a reading of 935,000 before the report was announced. Meanwhile, commodity prices took a tumble this week after the prospects of global demand took a hit due to the aforementioned global data. In the economic state that we are in now, the markets are experiencing conflicting signals.
Where do you think the economy is going? Let us know what you think.
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