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Tapering No, Obamacare Yes


Federal Reserve Chairman Ben Bernanke surprised analysts on Wednesday by announcing there would be no tapering at this time. The announcement sent waves around the planet as global equities turned up sharply. US equities surged off the news and continued their upwards movement Thursday. It had been expected the Federal Reserve would announce initial tapering of between $10 and $20 billion per month.

Bernanke’s move was a pullback from his original tapering announcement in May, when he indicated a tapering in the $85 billion bond buying measure was likely in three months and that the program would end when US unemployment hit 7 percent, around the middle of 2014. Unemployment dipped to 7.3 percent last month but the progress is due to more people leaving the labor force and is not reflective of new job growth.

The Federal Reserve’s balance sheet is now at $3.6 trillion and growing every month. Bernanke’s decision not to taper will give the incoming Chairman, presumably Janet Yellen, a dove, greater flexibility to start and end QE3 according to her own standards. Further policy statements could be made at the October meeting but at this point it appears no trimming will take place before December.

Yellen will face major decision as soon as she takes the reins in February.

  • When to begin asset purchase tapering
  • When to halt the buying program
  • How much to taper
  • Whether to trim purchase of Treasuries or mortgage-backed securities first.

The announcement boosted equities and weakened the dollar. Yellen is due to make a high-profile speech in New York on October 1. Investors may get insight into future Federal Reserve policy at that time. President Obama may propose Yellen for confirmation as early as next week.

Canada And Mexico

Canada had one eye on the Federal Reserve decision and another on its weakening employment sector. However, August inflation fell to 1.1 percent from 1.3 percent in July. The Bank of Canada is expected to hold its interest rate at 1.0 percent, where the rate has been since September 2010.

On Friday, the Canadian dollar was trading at $1.0289 USD or at $0.9719, down from Thursday. The loonie had posted  significant gains immediately after Bernanke’s startling announcement. The benchmark 10-year Canadian bond held with a yield of 2.713 percent.

Board minutes from Mexico’s Central Bank showed the Board was divided over the lowering of interest rates earlier in the month. Mexico has reduced the interest rate to 3.75 percent, down 25 basis points. This marks the lowest  Mexican rates have been since before the recession in 2008.

Euro Watches German Elections

The USD moved up against a basket of currencies in early Friday morning trading. Immediately after Bernanke’s announcement on Wednesday, the dollar had slumped to 80.060. Friday morning, a slight comeback bumped the dollar to 80.37. Nervousness about an undefined Federal Reserve policy was weighing on the greenback.

All eyes in Europe are on the elections in Germany where Chancellor Angela Merkel is expected to win a third term. However, Merkel may lose control of Parliament as her centre-right coalition looks to be losing seats.

The euro was up 0.01 percent against the yen to 134.60. Against the USD, the euro was trading at $1.3545 Friday morning after striking a 7-month high on Thursday.

The dollar was flat at 99.39 yen. The yen endured a broad selloff on Thursday. The yen hit a 3-month low against the Australian dollar on Thursday and touched a 4-year low against the euro.

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Step Aside Washington Let The Economy Work


Despite Washington’s dysfunction, the US Labor Department’s Non-Farm Payroll report showed 155,000 jobs were added in December. Additionally, another 15,000 jobs were adjusted to the November total. By all accounts, the figure continued a steady progressive trend.

Based on the antics of a devastatingly dysfunctional 112th Congress, many analysts feared for the worst. Over the last 60 years, the unemployment rate has averaged 6.0 percent. Today, the unemployment rate is 7.8 percent and there are few reasons to think the economy can re-create more prosperous times. The December unemployment rate is one percent less than 12 months ago.

There are many theories about the direction of the US recovery. However, analysts all agree that the dysfunction in Washington may be the nation’s biggest hurdle.  With momentum leaning forward, the economy received no lift from the pitiful resolution of the fiscal cliff. There is not one provision in this divisive piece of legislation that gives the economy direction much less the much needed stability to know where the country is headed. Lacking than a clear direction of financial policy, the government has engulfed the business community with instability. Business leaders have learned very little about what demands a resolution to the debt crisis will make.

The end result of the first leg of the self-imposed fiscal cliff is that business leaders know less about the direction of the solution than before negotiations commenced. Businesses are again forced to hoard their capital in preparation for the next Congressional debacle. It is a sorry state and not one worthy of the world’s largest economy.

In December, average hourly earnings increased by 0.3 percent. Two important sectors that have been gutter-bound since the outset of the recession, construction and manufacturing, reflect progress as new jobs increased in both sectors.

To many observers, new job creation in December is disappointing. To others, it is a miracle that the economy has withstood a government seemingly on a path of self-destruction. Retail sales over the holidays were below expectations. Consumers started the holiday buying season at a good pace but as the fiscal cliff approached, many consumers applied the brakes. Now, facing several more agonizing fiscal negotiations and when the country needs the full power of the American consumer, it becomes difficult to see positive growth and new job creation.

Will the Congress Remove the Shackles?

The politicians will be negotiating the debt ceiling, and the pending portion of the fiscal cliff in upcoming months. If that isn’t enough to dim the economy, consider it a miracle.

On a positive side, automakers have achieved great success in 2012. And, local, state and national payrolls cut 13,000 jobs in December.

What the country needs is a well-considered debt reduction plan. Only the development of such a plan will encourage corporate investment and return consumers to open pocketbooks. The chances for a resounding debt resolution plan are cloudy at best.

Richard Gilhooly, an interest rate strategist for TD Securities, New York, offered a sound observation regarding the current job marketplace. “Private sector payrolls at 168,000 were fairly robust in December and the general view is that the recent numbers were likely depressed by fiscal cliff issues, such that improvement should be seen in coming months.

“The household survey was weaker, with only 28,000 jobs, while 192,000 people entered the labor force, pushing the unemployment rate 0.1% higher. Bonds initially traded higher on the unemployment rate and the idea that QE is pegged to at least 6.5 percent, but the market has traded back to the lows subsequently on what is generally a firm report and likely better ahead.”

Imagine where the economy would be if Washington stopped presenting obstacles to a motivated environment.

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