Market Outlook - BNP PARIBAS - Investment Services India

The subtle changes in the wording of the
statement include a more confident belief that
consumption growth is accelerating, inventories
are under control and economic activity is
strengthening
One of the most prominent of these text changes has
to do with household spending. In December the
FOMC stated, “Household spending appears to be
expanding at a moderate rate” whereas, in January,
the FOMC believe that “Household spending is
expanding at a moderate rate”. Another, not so
subtle, change in view concerns the inventory
correction. In December the FOMC wrote that, “Firms
continue to make progress in bringing inventory
stocks into better alignment with sales” whereas now
they believe that “Firms have brought inventory
stocks into better alignment with sales”. As a result,
the FOMC now thinks that, “Information received
since the Federal Open Market Committee met in
December suggests that economic activity has
continued to strengthen”. In contrast, in December,
the FOMC wrote that, “Information received since the
Federal Open Market Committee met in November
suggests that economic activity has continued to pick
up”.
The FOMC removed all references to the housing
sector, despite the disappointing flow of data
The most significant window into the FOMC’s
thinking is that it removed any reference to the
housing sector. In December it was concerned about
this sector’s recovery and wrote: “The housing sector
has shown some signs of improvement over recent
months”. Since then, all the news on the housing
sector has been extremely disappointing. In
December, new and existing home sales crashed
7.6% and 16.7% m/m respectively and housing starts
fell 4%. All were well below the consensus forecasts.
Thus, the depressing housing data must have also
surprised the FOMC members and yet they chose to
avoid any reference to this disturbing reversal of the
housing market’s recovery.
The FOMC apparently did not want to disrupt its
plan to end its purchases of mortgage-backed
securities by 31 March
The lack of reference to the housing market’s
reversal is an important omission in light of its goal to
stop purchasing agency issues and agency
mortgage-backed securities by the end of March.
Despite the very obvious deterioration in the housing
sector’s recovery, the FOMC remains adamant that it
will end its support of the mortgage market. We had
previously thought that, given the reversal of the
recovery in the housing sector, the FOMC would
make the end of purchases more conditional on the
housing sector’s recovery. Clearly the FOMC was not
as concerned about the dependence of the housing
Chart 3: The Liquidity Initiatives are Winding
Down
Source: Reuters EcoWin Pro
Chart 4: Time for a Rise in the Discount Rate
Source: Reuters EcoWin Pro
sector’s recovery on its mortgage market support.
The FOMC will therefore purchase an additional
USD 279bn of agency mortgage-backed securities
between now and 31 March, which will continue to
enlarge its balance sheet.
The FOMC was also slightly less emphatic that
inflation will be subdued for some time
There were also two subtle changes to the brief
remarks on inflation from the previous policy
statement. First, the FOMC substituted the term
“restrain” for “dampen” in their statement that, “With
substantial resource slack continuing to restrain cost
pressures and with longer-term inflation expectations
stable, inflation is likely to be subdued for some
time”. The nuance here is that dampen means to
deaden or depress while restrain means to hold
back. This is a significant difference in meaning. The
second tiny nuance was that they currently believe
that inflation is “likely” to be subdued instead of “will
remain” subdued for some time.
Brian Fabbri 29 January 2010
Market Mover
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