Around the Street
Experts Talk Stocks, the Economy, and the Fed's Next Move
What did experts have to say on Sept. 24 about developments in the economy and markets? BusinessWeek compiled comments from Wall Street strategists and economists.
Michael Englund, Action Economics
The U.S. existing-home sales report revealed a surprising 2.7% August drop to just a 5.100 million [annual] rate, from an unrevised 5.240 million rate in July, though the sales pace still lies well above the 4.490 million January trough. The sales rate also remains above the 4.86-5.06 million range that once appeared to be the "floor" over the 13 months ending in October—before the accelerated collapse in global financial markets ratcheted the housing data to new lows.
We expect an ongoing uptrend in these figures beyond August, given the upward trajectory for pending home sales, [reported mortgage] loans, [housing] starts, and the continued impact of the first-time home buyer's credit.
David Wyss, Standard & Poor's
Initial claims for unemployment insurance fell 21,000 in the week ending Sept. 19 to 530,000. The consensus estimate was 546,000. Note, however, that the previous week was revised upward by 11,000. The number of people receiving benefits fell 123,000 in the week ending Sept. 12 to 6,138,000, lowering the insured unemployment rate 0.1 to 4.6%. The data are better than expected, as layoffs gradually slow from their summer peak. However, layoffs remain high by normal standards.
Julian Callow, Barclays Capital
In an article in today's Financial Times, "Fed watcher" K. Guha wrote that "most policymakers presently anticipate that the first rate hike will not come before the second half of 2010." This fits in with our view that the Fed will commence tightening with a 25-basis-point hike [in the Fed funds rate target] in the third quarter of 2010. The article also observes the Fed, which wants to establish the mechanisms for tightening well in advance, is considering the possibility of reverse repo transactions with money market mutual funds (MMMFs) as part of a "belt and braces" approach (to ensure, that when it wants to tighten, it has sufficient instruments available to make that effective).
It is generally thought the Fed is able to achieve increases in interest rates because, since last October, it has been paying interest on reserves. However, the Fed's extraordinary asset purchase program has resulted, so far, in $800 billion of excess reserves in the banking system.
Andrew Tilton, Goldman Sachs
The financial crisis and deep U.S. recession have prompted concerns about a sustained reduction in the economy's growth potential (the growth rate of potential supply, rather than demand), perhaps to as low as 2% per year. We take a more positive stance. Although the financial crisis will have an impact on the potential output of the U.S. economy, it is more likely to be a one-off effect on the level of potential output than a permanent hit to potential growth.
As evidence of this view, 1) economic theory suggests temporary rather than permanent effects on potential growth; 2) detailed empirical studies have found evidence of a one-time hit from financial crises but no consistent impact on trend growth; 3) recent U.S. productivity performance has been encouraging. We therefore continue to expect potential real GDP growth in the neighborhood of 2% per year.
Larry Kantor, Barclays Capital
In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself—or at least the recognition of it—that provides the greatest source of risk to the continuation of the market rally. Once investors embrace that a "normal" recovery has arrived, they will quickly conclude that the current "crisis" settings for policy—such as near-zero interest rates—are no longer appropriate. That—along with the impending withdrawal from direct purchases of duration by central banks—will drive interest rates higher and make it much more difficult for stock and corporate bond prices to keep rising.
In other words, the good news that the patient has recovered will shift toward the more sobering news that the bill has come due. That recognition—which is likely to be fostered by still more positive surprises on the economic data front, especially in the U.S.—will be the signal to reduce exposure, and it could well come before the end of the year.