Wed 22 Feb 2017

AUD movements

In Portfolioticker today

Today at the stock market NBR

bull/bearThe USD fell while Treasuries advanced after minutes from the Federal Reserve’s latest meeting showed officials confident they can raise rates gradually amid little threat that near-term inflation will accelerate. The S&P 500 index slipped from an all-time highs after rising in nine of the past 10 days.

The S&P 500 fell 0.1% to 2,362.59 at 4 p.m. in New York.

DuPont Co. rose as much as 4.5% to a record after Bloomberg News reported on Wednesday that European Union antitrust regulators are on track to approve the company’s historic merger with Dow Chemical Co. The chemical company’s surge helped the Dow Jones Industrial Average add 0.2% to a fresh record.

The Nasdaq Composite Index and the Russell 2000 Index slipped from all-time highs.

The Stoxx Europe 600 Index gave up earlier gains to end little changed. The gauge hit the highest level since Dec 2015 as volatility dropped to the lowest since mid-2014.

The MSCI Asia Pacific Index was at the highest level since Jul 2015 as Chinese shares traded in Hong Kong resumed a rally. Japanese equities managed to end higher even after fluctuations in the JPY pressured the Topix.

The USD edged lower after the Fed minutes showed officials prepared to raise rates “fairly soon,” though confident they would not have to rush to tighten. The torrid gains in American equities stalled on a day with few earnings reports and data showing continued strength in the U.S. housing market. Europe’s currency rebounded, after briefly falling below EUR 1.05 for the first time in more than 6 weeks, as French centrist Francois Bayrou bowed out of the presidential race and offered his support to independent candidate Emmanuel Macron. Oil fell from the highest price in more than a week.

The market response to the Fed minutes from a meeting three weeks ago was moderate, with the USD showing the biggest reaction. The statement showed Fed officials wrestling with uncertainty on issues ranging from the Trump administration’s fiscal stimulus plans to the headwinds a rising USD may pose. The discussion of a rate hike “fairly soon” was tempered by other comments that indicated little concern about near-term inflation risks. The odds for an increase in Mar 2017 held at 36%. Allianz SE chief economic adviser Mohamed El-Erian said that seems “too low.”Bloomberg

Market indices

The shape of market indices today
^ Market indices today Chart: Yahoo Finance

Index Ticker Today Change 31 Dec 16 YTD
S&P 500 SPX (INX) 2,362.82 -0.11% 2,238.83 +5.53%
DJIA INDU 20,775.60 +0.15% 19,762.60 +5.12%
NASDAQ IXIC 5,860.63 -0.10% 5,383.12 +8.87%

The portfolio today

Index values

:-) Our USD-denominated index closed at a record high today of 2.441, beating the record of 2.435 set on 21 Feb 2017.

Index Currency Today Change 31 Dec 16 YTD
USD-denominated Index USD 2.441 +0.27% 2.105 +15.97%
Valuation Rate USD/AUD 0.77579 +0.34% 0.72663 +6.76%
AUD-denominated Index AUD 3.148 -0.07% 2.895 +8.74%

Stock price movements

The shape of the portfolio today
^ The shape of the portfolio today Chart: Yahoo Finance

Portfolio stock prices

:-) Apple closed on a record high of $137.11, beating the record of $136.70 set on 21 Feb 2017.
:-) Amazon closed on a record high of $136.12, beating the record of $134.20 set on 8 Feb 2017.

Stock Ticker Today Change 31 Dec 16 YTD
Alphabet A GOOGL $851.36 +0.25% $792.45 +7.43%
Alphabet C GOOG $830.76 -0.11% $771.82 +7.63%
Apple AAPL $137.11 +0.30% $115.82 +18.38%
Amazon AMZN $855.61 -0.10% $749.87 +14.10%
Ebay EBAY $33.82 -0.29% $29.69 +13.91%
Facebook FB $136.12 +1.79% $115.05 +18.31%
PayPal PYPL $42.42 -0.02% $39.47 +7.47%
Twitter TWTR $16.08 -2.13% $16.30 -1.35%
Visa V $87.80 -0.10% $78.02 +12.53%
VMware VMW $91.76 -0.64% $78.73 +16.55%

52-week performance

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting



DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

The Bloomberg Dollar Spot Index (DXY) fell 0.2%.
The JPY strengthened 0.6% to 113.058 per USD to lead led advances in major currencies following 2 days of declines.
The EUR rose 0.3% to USD 1.0568 after touching a 6-week low, while the GBP reversed early gains, weakening 0.1 percent to $1.2461.


AUD movements
^ AUD movements against the USD today (mouseover for 12 month view) Chart:

Fears of inflating housing bubbles in Sydney and Melbourne are stopping the Reserve Bank from cutting interest rates to boost the economy, the central bank governor conceded today.

The stark admission by Reserve Bank governor Phillip Lowe about the RBA’s dilemma comes as soaring house prices in the eastern states have Australians carrying “more debt than they ever have before”.

Dr Lowe delivered the reality check at the Australia Canada Economic Leadership Forum, where he said low interest rates made it attractive for borrowers in both countries to invest in real estate, making further rate cuts an undesirable option.ABC

Oil and Gas Futures

Futures prices

Oil dropped on forecasts for another expansion in U.S. crude stockpiles while attention shifted to whether OPEC will extend production cuts.

West Texas Intermediate crude lost 1.4% to settle at $53.59/barrel. Brent fell 1.5% to close at $55.84.Bloomberg

Prices are as at 15:48 ET

  • NYMEX West Texas Intermediate (WTI): $53.57/barrel -1.40% Chart
  • ICE (London) Brent North Sea Crude: $55.80/barrel -1.52% Chart
  • NYMEX Natural gas futures: $2.61/MMBTU +1.91% Chart

flag_australia AU: RBA Speech at Australia-Canada Leadership Forum

Speech Extracts [rba]

The main focus of my remarks this morning is on the outlook for the Australian economy. I would like to talk about this outlook in the context of three issues that I hope will have strong resonance with the Canadians in the audience. The first of these is the cycle in investment in the resources sector. The second is developments in the housing market and household borrowing. And the third is inflation targeting in a low inflation, low interest rate environment.

The Outlook

The RBA released its latest economic forecasts a couple of weeks ago.

We expect economic growth to be around 3 per cent over the next couple of years. This is a little faster than our current estimate of the potential growth of our economy. Despite this, we do not expect much change in the current rate of unemployment, which stands at around 5¾ per cent. This is because some of the above-potential growth is a result of the expansion of LNG production, which does not employ that many people.

Given this outlook, we expect underlying inflation to increase, but to do so only gradually. Wage growth remains subdued, but is not expected to decline further, and spare capacity is likely to remain in the economy for some time yet. Our central forecast is for headline inflation to increase to above 2 per cent later this year, boosted by increases in oil and tobacco prices. The increase in underlying inflation is expected to be a bit more gradual.

Commodities and Investment

The first of the three issues that I expect will strike a resonance with Canadians is the shifts in commodity prices and investment in the resources sector. This is a major factor that has shaped economic outcomes in both our countries.

While the general stories are similar, the details are different. One area of difference is the size of the movements in the prices of our main exports, summarised in the terms of trade. Australia’s terms of trade almost doubled over the first decade of this century and in 2011 reached their highest level since the gold rushes of the 1850s. The increase in Canada was also large in a historical context, although it was not as large as that in Australia.


Housing and Borrowing

I would now like to turn to a second issue that I think will strike resonance with Canadians: housing prices and borrowing. This is an issue that is discussed a lot in both our countries. We have both had strong housing markets over recent years and there are concerns about the level of household indebtedness. There are some similarities in the factors at work.

One is that our populations have been growing quickly for advanced industrialised countries. In Australia, population growth has averaged 1.7 per cent over the past decade, while in Canada it has averaged 1.1 per cent. Over the past couple of years the growth rates have moved closer together.

Another similarity is that there has been strong demand from overseas residents for investments in residential property, particularly in our wonderful Pacific-rim cities … Given the strong demand and its impact on prices in some areas, some state and provincial governments have recently levied additional taxes on foreign investors in residential property.

Our housing markets have also been affected by the global monetary environment. We both run independent monetary policies, but the level of our interest rates is influenced by what happens elsewhere in the world. With interest rates so low and our economies being resilient, it is not so surprising that people have found it an attractive time to borrow to buy housing.


The increase in overall housing prices in both our countries has gone hand in hand with a further pick-up in household indebtedness. In both countries the ratio of household debt to income is at a record high, although the low level of interest rates means that the debt-servicing burdens are not that high at the moment.

In Australia, the household sector is coping reasonably well with the high levels of debt. But there are some signs that debt levels are affecting household spending. In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination.

Reflecting this, our latest forecasts were prepared on the basis that growth in consumption was unlikely to run ahead of growth in household income over the next couple of years; in other words the household saving rate was likely to remain constant. This is a bit different from recent years, over which the saving rate had trended down slowly.


This interaction between consumption, saving and borrowing for housing is a significant issue and one that I know both central banks are watching carefully. It is one of the key uncertainties around our central scenario for the Australian economy. It was also cited as one of the key risks for the inflation outlook in the Bank of Canada’s latest Monetary Policy Report. We are still learning how households respond to higher debt levels and lower nominal income growth.

Inflation Targeting in a Low Inflation Environment

I would now like to turn to a third issue where there is some commonality of experience: that is dealing with an extended period of low inflation.

For a few years now, both countries have experienced low rates of inflation. Many of the same factors have been at play. Wage growth has been subdued given the ongoing slack in the labour market. We have both also seen downward pressure on retail prices from intensified competition. In its latest Monetary Policy Report, the Bank of Canada noted that this was one issue affecting food prices. The same is true in Australia, but the experience here is broader, with new entrants, including overseas retailers, putting downward pressure on the prices of a wide range of goods.


We are both expecting inflation to increase, but only gradually so. In our case, we expect the disinflationary effects of the earlier decline in commodity prices and the competitive pressures in retailing to wane. Some pick-up in wages growth is also expected, although wage increases are likely to remain below average for some time yet.

Over recent times, both central banks have had to think about the implications for their monetary policy frameworks of sustained low inflation and rapid increases in borrowing and housing prices. Both have recently reaffirmed that inflation targeting remains the right monetary policy framework.

At any point in time there are quite a few possible paths that the cash rate could follow to achieve Australia’s inflation target, which is to achieve an average rate of inflation over time of 2 point something. Consistent with the Reserve Bank Act, we set out to choose the path that, in our judgement, best promotes the welfare of the Australian people.

In our risk management exercises, we have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing.

If inflation is low for a long period of time, it is certainly possible that inflation expectations adjust, making it harder to achieve the objective. At the moment though, I don’t see a particularly high risk of this in Australia.

In relation to the risks from additional borrowing, it is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets. If so, then at some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment. It is difficult to quantify this risk, but it is one that is difficult to ignore. As I said, our focus is on the medium term, not just the next year or so.

Phillip Lowe, Governor, Reserve Bank of Australia, “Australia and Canada – Shared Experiences“, Speech given to Australia-Canada Economic Leadership Forum, Sydney – 22 February 2017 Full Speech

flag_australia AU: Wage Price Index. Q4/2016

Press Release Extract [ser_156]


National/Sector (seasonally adjusted)

In the December quarter 2016, the Private sector index rose 0.4% and the Public sector rose 0.6%. The All sectors quarterly rise was 0.5%.

Through the year, All sectors rose 1.9%. The Private sector through the year rise to the December quarter 2016 was 1.8%, a new record low for the series, and the Public sector rose 2.3%.

National/Sector (original)

In the December quarter 2016, wages rose 0.4% for All sectors. Private sector wages grew 0.3%, which continues the slowing of wages growth over the last two years. The Public sector quarterly rise was 0.6%.

The All sectors through the year rise was 2.0%. Through the year Private sector growth continues to track below the Public sector, 1.8% and 2.3% respectively.

Industry (original)

Wage Price Index

In the Private sector, Information media and telecommunication services recorded the highest quarterly rise of 1.1% and Mining, Wholesale trade, Professional, scientific and technical services and Other services had the lowest growth over the quarter (0.1%). Rises through the year in the Private sector ranged from 1.0% for Mining to 2.4% for Education and training and Health care and social assistance.

Mining recorded the lowest through the year growth since the start of the WPI for the second consecutive quarter. Industries exposed to Mining such as Construction, Professional, scientific and technical services and Administrative and support services also continue to have low wages growth.

In the Public sector, Health care and social assistance recorded the highest quarterly rise of 0.8%. The rate of wage growth was influenced by recently ratified Public sector enterprise agreements delivering wage increases this quarter. Electricity, gas, water and waste services, Professional, scientific and technical services and Public administration and safety recorded the lowest quarterly wages growth of 0.5%.

Rises through the year in the Public sector ranged from 1.5% for Professional, scientific and technical services to 2.5% for Education and training.

Australian Bureau of Statistics, “6345.0 – Wage Price Index. Dec 2016“, 22 Feb 2017 More

flag_europe EU: Inflation (HICP). Jan 2017

Press Release Extract [ser_21]


Euro area annual inflation was 1.8% in January 2017, up from 1.1% in December 2016. In January 2016 the rate was 0.3%. European Union annual inflation was 1.7% in January 2017, up from 1.2% in December. A year earlier the rate was 0.3%. These figures come from Eurostat, the statistical office of the European Union.


In January 2017, the lowest annual rates were registered in Ireland (0.2%), Romania (0.3%) and Bulgaria (0.4%). The highest annual rates were recorded in Belgium (3.1%), Latvia and Spain (both 2.9%), and Estonia (2.8%). Compared with December 2016, annual inflation fell in two Member States and rose in twenty-six.

The largest upward impacts to euro area annual inflation came from fuels for transport (+0.50 percentage points), heating oil and vegetables (+0.14 pp each), while telecommunication (-0.09 pp), gas (-0.08 pp) and bread & cereals (-0.05 pp) had the biggest downward impacts.

Eurostat, “Inflation (HICP). Jan 2017“, 22 Feb 2017 More

flag_usa US: Existing Home Sales. Jan 2017

Press Release Extract [ser_15]

Existing-home sales stepped out to a fast start in 2017, surpassing a recent cyclical high and increasing in January to the fastest pace in almost a decade, according to the National Association of Realtors®. All major regions except for the Midwest saw sales gains last month.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, expanded 3.3 percent to a seasonally adjusted annual rate of 5.69 million in January from an upwardly revised 5.51 million in December 2016. January’s sales pace is 3.8 percent higher than a year ago (5.48 million) and surpasses November 2016 (5.60 million) as the strongest since February 2007 (5.79 million).

Lawrence Yun, NAR chief economist, says January’s sales gain signals resilience among consumers even in a rising interest rate environment. “Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home,” he said. “Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

The median existing-home price for all housing types in January was $228,900, up 7.1 percent from January 2016 ($213,700). January’s price increase was the fastest since last January (8.1 percent) and marks the 59th consecutive month of year-over-year gains.

Total housing inventory at the end of January rose 2.4 percent to 1.69 million existing homes available for sale, but is still 7.1 percent lower than a year ago (1.82 million) and has fallen year-over-year for 20 straight months. Unsold inventory is at a 3.6-month supply at the current sales pace (unchanged from December 2016).

Properties typically stayed on the market for 50 days in January, down from 52 days in December and considerably more a year ago (64 days). Short sales were on the market the longest at a median of 108 days in January, while foreclosures sold in 51 days and non-distressed homes took 49 days. Thirty-eight percent of homes sold in January were on the market for less than a month.

“Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower and mid-market price range,” added Yun. “NAR and®’s new ongoing research — the Realtors® Affordability Distribution Curve and Score — revealed that the combination of higher rates and prices led to households in over half of all states last month being able to afford less of all active inventory on the market based on their income.”

Inventory data from® reveals that the metropolitan statistical areas where listings stayed on the market the shortest amount of time in January were San Jose-Sunnyvale-Santa Clara, Calif., 43 days; San Francisco-Oakland-Hayward, Calif., 47 days; San Diego-Carlsbad, Calif., 55 days; Seattle-Tacoma-Bellevue, Wash., 57 days; and Nashville-Davidson-Murfreesboro-Franklin, Tenn., Vallejo-Fairfield, Calif., and Greeley, Colo., all at 58 days.

NAR President William E. Brown, a Realtor® from Alamo, California, cautions about another source that could possibly drag down inventory for would-be buyers in coming months. “Supply and demand imbalances continue to be burdensome in many markets, and now Fannie Mae is supporting a Wall Street firm’s investment in single-family rentals,” he said. “This will only further hamper tight supply and put major investors in direct competition with traditional buyers. Instead, the GSEs should lower overly burdensome fees (link is external) and help qualified borrowers become homeowners.”

First-time buyers were 33 percent of sales in January, which is up from 32 percent both in December and a year ago. NAR’s 2016 Profile of Home Buyers and Sellers — released in late 2016 — revealed that the annual share of first-time buyers was 35 percent.

According to Freddie Mac, the average commitment rate (link is external) for a 30-year, conventional, fixed-rate mortgage decreased slightly in January to 4.15 percent from 4.20 percent in December. The average commitment rate for all of 2016 was 3.65 percent.

All-cash sales were 23 percent of transactions in January, up from 21 percent in December but down from 26 percent a year ago. Individual investors, who account for many cash sales, purchased 15 percent of homes in January, unchanged from December and down from 17 percent a year ago. Fifty-nine percent of investors paid in cash in January.

Distressed sales — foreclosures and short sales — were 7 percent of sales in January, unchanged from December and down from 9 percent a year ago. Five percent of January sales were foreclosures and 2 percent were short sales. Foreclosures sold for an average discount of 14 percent below market value in January (20 percent in December), while short sales were discounted 10 percent (unchanged from December).

National Association of Realtors, “Existing Home Sales. Jan 2017“, 22 Feb 2017 (10:00) More

flag_usa US: FOMC Minutes


(As amended effective January 31, 2017)

“The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.8 percent.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.”

The Committee considered amendments to its Policy on External Communications of Committee Participants and its Policy on External Communications of Federal Reserve System Staff. The amendments consisted of:

  1. starting the communication blackout earlier (the second Saturday before Committee meetings);
  2. revising the treatment of staff presentations during the blackout period;
  3. revising provisions regarding regularly published System releases of data, survey results, statistical indexes, and model results during the blackout period;
  4. explicitly recognizing the need for ongoing communications with the public by staff members during the blackout period for operational or information gathering purposes; and
  5. making several miscellaneous changes, generally to improve clarity.

All participants supported the revisions, and the Committee voted unanimously to approve the revised policies.

Illustration of Uncertainty in the Summary of Economic Projections

Participants considered a revised proposal from the subcommittee on communications to add to the Summary of Economic Projections (SEP) a number of charts (sometimes called fan charts) that would illustrate the uncertainty that attends participants’ macroeconomic projections. The revised proposal was based on further analysis and consultations following Committee discussion of a proposal at the January 2016 meeting. Participants generally supported the revised approach and agreed that fan charts would be incorporated in the SEP to be released with the minutes of the March 14–15, 2017, FOMC meeting. The Chair noted that a staff paper on measures of forecast uncertainty in the SEP, including those that would be used as the basis for fan charts in the SEP, would be made available to the public soon after the minutes of the current meeting were published, and that examples of the new charts using previously published data would be released in advance of the March meeting.

Developments in Financial Markets and Open Market Operations

The SOMA manager reported on developments in U.S. and global financial markets during the period since the Committee met on December 13–14, 2016. Financial asset prices were little changed since the December meeting. Market participants continued to report substantial uncertainty about potential changes in fiscal, regulatory, and other government policies. Nonetheless, measures of implied volatility of various asset prices remained low. Emerging market currencies were generally resilient in recent weeks, reportedly benefiting from investors’ anticipation of stronger global economic growth, after depreciating significantly against the dollar during the previous intermeeting period. Market expectations for the path of the federal funds rate were little changed over the intermeeting period.

The deputy manager followed with a briefing on developments in money markets, market expectations for the System’s balance sheet, and open market operations. In money markets, interest rates smoothly shifted higher following the Committee’s decision at its December meeting to increase the target range for the federal funds rate by 25 basis points, and federal funds subsequently traded near the center of the new range except on year end. Although year-end pressures in U.S. money markets were similar to past quarter-ends, some notable, albeit temporary, strains appeared over the turn of the year in foreign exchange swap markets and European markets for repurchase agreements. The Open Market Desk’s surveys of dealers and market participants pointed to some change in expectations for FOMC re-investment policy, with more respondents than in previous surveys anticipating a change in policy when the federal funds rate reaches 1 to 1½ percent. The higher level of take-up at the System’s overnight reverse repurchase agreement facility that developed following the implementation of money market fund reform last fall generally persisted. The staff also briefed the Committee on plans for small-value tests of various System operations and facilities during 2017 and for quarterly tests of the Term Deposit Facility.

By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.

Staff Review of the Economic Situation

The information reviewed for the January 31–February 1 meeting indicated that real gross domestic product (GDP) expanded at a moderate rate in the fourth quarter of last year and that labor market conditions continued to strengthen. Consumer price inflation rose further above the slow pace seen during the first half of last year, but it was still running below the Committee’s longer-run objective of 2 percent.

Recent indicators generally showed that labor market conditions continued to improve in late 2016. Total nonfarm payroll employment increased at a solid pace in December. The unemployment rate edged up to 4.7 percent but remained near its recent low, while the labor force participation rate rose slightly. The share of workers employed part time for economic reasons decreased further. The rates of private-sector job openings and of hiring were unchanged in November, while the rate of quits edged up. The four-week moving average of initial claims for unemployment insurance benefits was still low in December and early January. Measures of labor compensation continued to rise at a moderate rate. The employment cost index for private industry workers rose 2¼ percent over the 12 months ending in December, and average hourly earnings for all employees increased almost 3 percent over the same 12-month period. The unemployment rates for African Americans, for Hispanics, and for whites were close to the levels seen just before the most recent recession, but the unemployment rates for African Americans and for Hispanics remained above the rate for whites.

Total industrial production edged down in the fourth quarter as a whole. Mining output expanded markedly, but manufacturing production advanced only modestly. The output of utilities declined, as the weather was unseasonably warm, on average, during the fourth quarter. Automakers’ assembly schedules suggested that motor vehicle production would be a little lower early this year, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, were consistent with modest gains in factory output in the near term.

Real personal consumption expenditures (PCE) rose at a moderate pace in the fourth quarter. Consumer expenditures for durable goods, particularly motor vehicles, increased considerably. However, consumer spending for energy services declined markedly, reflecting unseasonably warm weather. Recent readings on some key factors that influence consumer spending— including further gains in employment, real disposable personal income, and households’ net worth—were consistent with moderate increases in real PCE in early 2017. In addition, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, moved up to an elevated level in December and January.

Real residential investment spending rose at a brisk pace in the fourth quarter after decreasing in the previous two quarters. Building permit issuance for new single-family homes—which tends to be a reliable indicator of the underlying trend in construction—advanced solidly. Sales of existing homes increased modestly in the fourth quarter, although new home sales declined.

Real private expenditures for business equipment and intellectual property (E&I) expanded at a moderate pace in the fourth quarter after declining, on net, over the preceding three quarters. Recent increases in nominal new orders of nondefense capital goods excluding aircraft, along with improvements in indicators of business sentiment, pointed to further moderate increases in real E&I spending in the near term. Real business expenditures for nonresidential structures declined in the fourth quarter after rising in the previous quarter. The number of crude oil and natural gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to increase through late January. The change in real inventory investment was estimated to have made an appreciable positive contribution to real GDP growth in the fourth quarter.

Real total government purchases rose somewhat in the fourth quarter. Federal government purchases for defense decreased while nondefense expenditures increased. State and local government purchases increased modestly, as the payrolls of these governments expanded slightly and their construction spending advanced somewhat.

The U.S. international trade deficit widened in November for the second consecutive month. After declining in October, nominal exports fell again in November as decreases in exports of capital goods more than offset increases in exports of industrial supplies. Nominal imports in November rose to their highest level of the year, led by imports of industrial supplies and materials. The Census Bureau’s advance trade estimates for December suggested a narrowing of the trade deficit in goods, as imports increased less than exports. Altogether, the change in real net exports was estimated to have made a substantial negative contribution to real GDP growth in the fourth quarter.

Total U.S. consumer prices, as measured by the PCE price index, increased a little more than 1½ percent over the 12 months ending in December, partly restrained by decreases in consumer food prices last year. Core PCE price inflation, which excludes changes in food and energy prices, was 1¾ percent over those same 12 months, held down in part by decreases in the prices of non-energy imports over part of this period. Over the same 12-month period, total consumer prices as measured by the consumer price index (CPI) rose a bit more than 2 percent, while core CPI inflation was 2¼ percent. Survey-based measures of median longer-run inflation expectations—such as those from the Michigan survey and from the Desk’s Survey of Primary Dealers and Survey of Market Participants—were unchanged, on net, over December and January.

Foreign real GDP growth appeared to slow somewhat in the fourth quarter from its relatively strong third quarter pace. Nevertheless, recent data on foreign industrial production and trade seemed to be stronger than private analysts had anticipated and were consistent with moderate economic growth abroad. Economic growth in both the euro area and the United Kingdom continued at relatively solid rates. In the emerging market economies (EMEs), GDP growth remained robust in China but slowed elsewhere in the Asian EMEs and in Mexico, while the pace of economic contraction appeared to lessen in South America. Inflation in the advanced foreign economies (AFEs) continued to rise, largely reflecting the pass-through of earlier increases in crude oil prices into retail energy prices. Inflation also rose in many EMEs, in part because of rising food and fuel prices; however, inflation fell notably in much of South America.

Staff Review of the Financial Situation

Domestic financial conditions were mostly little changed, on balance, since the December FOMC meeting. Broad equity price indexes fluctuated in a relatively narrow range and ended the intermeeting period about unchanged. Nominal Treasury yields moved up across most maturities in the days following the December FOMC meeting but subsequently reversed and ended the period little changed on net. Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) rose somewhat on balance. Amid notable volatility, the broad dollar index declined slightly on net. Meanwhile, financing conditions for nonfinancial businesses and households remained generally accommodative.

Although the FOMC’s decision to raise the target range for the federal funds rate to ½ to ¾ percent at the December meeting was widely anticipated in financial markets, contacts generally characterized some of the communications associated with the FOMC meeting as less accommodative than expected. In particular, market commentaries highlighted the upward revision of 25 basis points to the median projection for the federal funds rate at the end of 2017 in the SEP. Nonetheless, the expected path of the federal funds rate implied by futures quotes was little changed, on net, since the December meeting. Market-based estimates indicated that investors saw the probability of an increase in the target range for the federal funds rate at the January 31 – February 1 FOMC meeting as very low, and the estimated probability of an increase in the target range at or before the March meeting was about 25 percent. Consistent with readings based on market quotes, results from the Desk’s January Survey of Primary Dealers and Survey of Market Participants indicated that the median respondent assigned a probability of about 25 percent to the next increase in the target range occurring at or before the March FOMC meeting. Market-based estimates of the probability of an increase in the target range at or before the June meeting were about 70 percent.

Yields on nominal Treasury securities increased across most maturities following the December FOMC meeting, but they fell, on balance, over the remainder of the intermeeting period. While market commentary suggested that a number of factors contributed to the decline, a clear catalyst was difficult to identify. Treasury yields ended the period about unchanged and remained significantly higher than just before the U.S. elections in November. TIPS-based measures of inflation compensation edged up over the intermeeting period.

Broad U.S. equity price indexes fluctuated in a relatively narrow range and were little changed, on net, over the intermeeting period. However, equity prices remained notably higher than just before the November elections, apparently reflecting investors’ expectations that fiscal and other policy changes would boost corporate profits and economic activity in the medium term. Implied volatility on the S&P 500 index edged down since the December meeting and remained relatively low. Corporate bond spreads for both investment and speculative grade firms continued to narrow over the intermeeting period and were near the bottom of their ranges of the past several years.

Money market rates responded as expected to the change in the target range for the federal funds rate. The effective federal funds rate was 66 basis points—25 basis points higher than previously—every day following the change, except at year-end. Conditions in other domestic short-term funding markets were generally stable over the intermeeting period. Assets under management by money market funds changed little, with government funds experiencing modest net outflows and prime fund assets remaining about flat.

Financing conditions for nonfinancial businesses continued to be accommodative overall. Corporate bond issuance by nonfinancial firms rebounded in December to about its robust average pace of the past few years, and issuance of syndicated leveraged loans was strong. Gross equity issuance was solid in November and December. Meanwhile, after a slowdown in the third quarter, the growth of commercial and industrial (C&I) loans on banks’ books picked up in the fourth quarter, although the pace remained slower than earlier in the year. The January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that banks left C&I lending standards for large and middle-market firms and for small firms unchanged, on balance, in the fourth quarter. On net, banks expected to ease their standards for C&I loans somewhat in 2017 …

Staff Economic Outlook

In the U.S. economic projection prepared by the staff for this FOMC meeting, the near-term forecast was little changed from the December meeting. Real GDP growth in the fourth quarter of last year was estimated to have been a little faster than the staff had expected in December, and the pace of economic growth in the first half of this year was projected to be essentially the same as in the fourth quarter. The staff’s forecast for real GDP growth over the next several years was little changed. The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was forecast to edge down gradually through the end of 2019 and to run below the staff’s estimate of its longer run natural rate; the path for the unemployment rate was little changed from the previous projection.

The staff’s forecast for consumer price inflation was unchanged on balance. The staff continued to project that inflation would increase over the next several years, as food and energy prices, along with the prices of non-energy imports, were expected to begin steadily rising either this year or next. However, inflation was projected to be marginally below the Committee’s longer-run objective of 2 percent in 2019.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, primarily reflecting the staff’s assessment that monetary policy appeared to be better positioned to offset large positive shocks than substantial adverse ones. However, the staff viewed the risks to the forecast from developments abroad as less pronounced than in the recent past. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were seen as roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially further were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

Committee Policy Action

In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in December indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid, and the unemployment rate had stayed near its recent low. Household spending had continued to rise moderately, while business fixed investment had remained soft. Measures of consumer and business sentiment had improved of late. Inflation had increased in recent quarters but was still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remained low; most survey-based measures of longer-term inflation expectations were little changed on balance.

With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. Members agreed that there was heightened uncertainty about the effects of possible changes in fiscal and other government policies, but that near-term risks to the economic outlook appeared roughly balanced. Many members continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly. These members expressed the view that inflation was likely to rise toward 2 percent gradually, and that policymakers would likely have ample time to respond if signs of rising inflationary pressures did begin to emerge. Other members indicated that if the labor market appeared to be tightening significantly more than anticipated or if inflation pressures appeared to be developing more rapidly than expected as resource utilization tightened, it might become necessary to adjust the Committee’s communications about the expected path of the federal funds rate. One member noted that, even if incoming data on the economy and inflation were consistent with expectations, taking the next step in reducing policy accommodation relatively soon would give the Committee greater flexibility in calibrating policy to evolving economic conditions.

At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee’s 2 percent objective over the medium term. This view was reinforced by the rise in inflation and increases in inflation compensation in recent months. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee’s inflation goal.

After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at ½ to ¾ percent. They judged that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.

The Committee agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels expected to prevail in the longer run. However, members emphasized that the actual path of the federal funds rate would depend on the evolution of the economic outlook as informed by incoming data.

The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Federal Reserve, “Minutes of the Federal Open Market Committee January 31–February 1, 2017“, 22 Feb 2017 Minutes

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