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MAKE MONEY BLOG$~As markets await the Jackson Hole speech forclues as to where Bernanke will take monetary policy, the Federal Reserve released its Beige Book for July and early August which showed “economic activity continued to expand gradually.”
The Fed’s latest look at current economic conditions came after Wednesday’s updated GDP numbers, which showed the economy expanding at an annual rate of 1.7% in the second quarter, as opposed to 1.5% in the previous estimate. While that is an encouraging sign, output is growing at rates that make it difficult to sustain the current unemployment rate.
Markets closed the day marginally in positive territory on Wednesday. All three major U.S. equity indexes traded up 0.1% New York with the Dow finishing off at 13,108 points, the S&P 500 at 1,410, and the Nasdaq hitting 3,081 points.
Better than expected data over the last couple of months has helped risk assets rally recently. Since the beginning of July, which is what the Beige book covered, housing data has improved and consumption seems to have picked up.
The Fed’s beige book noted “most districts indicated retail activity, including auto sales, had increased since the last Beige Book report.” Shares in retailers like Macy’s and Target have indeed performed well over the last two months, while auto names have been mixed. General Motors outperformed the S&P 500 while Ford languished.
Another positive sign coming from the Beige Book was the improvement in real estate markets. “On the residential side, all 12 districts cited increases in home sales, home prices, or housing construction,” while “reports on commercial real estate markets were also generally positive.” The data coincides with the recent Case-Shiller home price indexes, which marked their second consecutive month of increases. While real estate seems to have turned a corner, we are years away from a true recovery, as I reported previously.
On the inflation side, the Beige Book indicated that expectations on the core remain firmly anchored. Manufacturing and retail prices were largely stable, according to the report. But the effects of the devastating drought that is ravishing the U.S. were felt, with agricultural commodity prices causing concern in some districts.
Wednesday’s Beige Book report by no means tilts the scale for the Federal Reserve. Last week, the Fed released the FOMC minutes for the August meeting, which suggested further accommodation would be needed “fairly soon” unless economic conditions improved substantially. Markets appear to have taken this as an indication that QE3 is not only on the table, but coming, as risk assets rallied, sending gold up to recent highs.
With much of the prospective easing already priced in, as I explained previously, investors may end up being disappointed on Friday, when Bernanke speaks at the Jackson Hole Symposium. As the economic situation in the U.S. slowly deteriorates, Bernanke & Co. will also keep an eye out forMario Draghi and the ECB over in Europe, where market turbulence has given way to expectation over a reported bond-buying scheme that will drive yields lower. In China, stimulus is expected to push up economic activity. There are many moving parts, and any of these could direct market sentiment drastically in one way or the other. Bernanke, for now, seems to be in waiting mode.
source: forbes.com
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