Yesterday was an important day for the markets as the S&P again found support at around the 1040 level. Look at the chart below and you can clearly see this line of support…….
Overall though I believe the biggest driver going forward will be the looming elections.
Consumer Confidence
Today the Conference Board's Consumer Confidence Index, out at 10am ET, is forecast to come in at 51.0 for August, compared to the July reading of 50.4.
Most indicators that exist are lagging indicators, telling us more about where we've been than where we are going. Since a large part of the economy is driven by consumer spending, we can formulate a guesstimate (is that even a real word?) of where we are going by watching the consumer confidence measures. These measures follow and record how optimistic consumers are about the overall economy as well as their personal finances.
Consumer confidence is a measure of perception, not actual economic activity. But hey, perception is everything! it is measured through surveys of a carefully collected sample of people and how they feel about their financial health and the overall state of the economy.
The two dominant measures of consumer confidence are the Consumer Confidence Index (CCI) and the University of Michigan Consumer Sentiment Index (MCSI).
The one I am going to cover briefly is the CCI, which is based on monthly surveys of 5,000 U.S. households and consist of just five questions:
1) Current business conditions
2) Business conditions for the next six months
3) Current employment conditions
4) Employment conditions for the next six months
5) Expectations of total family income for the next six months
The results of these five questions are compared to similar results from 1985, considered a standard to measure against because the economy at that time was in the exact middle of a business cycle. The base is set at 100 (don't forget that #!) And all other results are presented as an index versus the 1985 base. So a reading of less than 100 indicates consumer pessimism and a reading above 100 indicates consumer optimism.
So, a high CCI suggest good things ahead for the economy; a low reading reflects consumer pessimism and suggest a downturn.
We are a consumer based economy where consumer spending makes us or breaks us, so I found this article relevant in TSP discussions…………
Consumer Confidence Still Stuck In The Mud from 24/7 Wall St. by Douglas A. McIntyre
The Thomson Reuters/University of Michigan Surveys of Consumers released its August report and the consumer will not be pulling the economy out of its current damaged state.
The Sentiment Index was 68.9 in the August 2010 survey, slightly above the 67.8 in July and last year’s 65.7.
The release came just hours after the Department of Commerce revised second quarter GDP improvement to 1.6% from 2.4%, primarily because of strength in imports and changes in inventory figures. Taken together and added to housing data from earlier this week, the numbers combine to show an American economy that has fallen back into recession.
The overall level of confidence remained largely unchanged in August as consumers did not panic in the face of slowing economic growth and the media’s double-dip drumbeat. The bad news is that consumers expect lackluster income and job growth for an extended period of time. This “new normal” outlook has encouraged consumers to pare down their debts and increase their reserve funds.
Articles I found pertinent and interesting………
For the remainder of this week I will be awaiting the release of the August employment report, due out on Friday morning. That is the biggest thing I will be tracking. But other things could definitely pop up.
Last week we got the GDP revised figure that was actually better than expected. The Street expected 1.4% revisions don from 2.4%, but it actually came in at 1.6%. But here is where I think it is starting to show how things currently are. That leaves the Fed with basically 3 options to save the economy………
Fed Options:
1) Buy more long-term securities to lower rates
2) Modify its policy statement to say that rates will stay low for longer than expected
3) Reduce interest paid on excess bank reserves at the Fed, giving lenders an incentive to deploy funds
But with rates already at record lows this probably won't help much. It doesn't seem to be an issue of making capital available, but more of a willingness to borrow money. I do expect there to be a lot of political pressure put on the Fed to increase its quantitative easing as a way to reduce unemployment.
So what was important about what Ben said on Friday?
Really What Bernanke Said Is That He Doesn't Have What It Takes To Fix The Economy from the Business Insider.......
The most interesting part of Bernanke's speech to the KC Fed Symposium is where he discusses the FOMC's policy options, in the event that weakening conditions warrant more easing.
And if you read it, the basic message is: Yeah, we have some options, and none of them is likely to work very well.
In the following section, he highlights three key possibilities, and in each case he makes a very good point why they might not work.
The bottom line: If youre hopes for a recovery hinge on the Fed, you should rethink that.
A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securities. As I noted earlier, the evidence suggests that the Fed's earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets. I regard the program (which was significantly expanded in March 2009) as having made an important contribution to the economic stabilization and recovery that began in the spring of 2009. Likewise, the FOMC's recent decision to stabilize the Federal Reserve's securities holdings should promote financial conditions supportive of recovery.
I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions. However, the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs. One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions. In particular, the impact of securities purchases may depend to some extent on the state of financial markets and the economy; for example, such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high. The possibility that securities purchases would be most effective at times when they are most needed can be viewed as a positive feature of this tool. However, uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.
Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations. (Of course, if inflation expectations were too low, or even negative, an increase in inflation expectations could become a benefit.) To mitigate this concern, the Federal Reserve has expended considerable effort in developing a suite of tools to ensure that the exit from highly accommodative policies can be smoothly accomplished when appropriate, and FOMC participants have spoken publicly about these tools on numerous occasions. Indeed, by providing maximum clarity to the public about the methods by which the FOMC will exit its highly accommodative policy stance--and thereby helping to anchor inflation expectations--the Committee increases its own flexibility to use securities purchases to provide additional accommodation, should conditions warrant.
A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement. As I noted, the statement currently reflects the FOMC's anticipation that exceptionally low rates will be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations.
Central banks around the world have used a variety of methods to provide future guidance on rates. For example, in April 2009, the Bank of Canada committed to maintain a low policy rate until a specific time, namely, the end of the second quarter of 2010, conditional on the inflation outlook.4 Although this approach seemed to work well in Canada, committing to keep the policy rate fixed for a specific period carries the risk that market participants may not fully appreciate that any such commitment must ultimately be conditional on how the economy evolves (as the Bank of Canada was careful to state). An alternative communication strategy is for the central bank to explicitly tie its future actions to specific developments in the economy. For example, in March 2001, the Bank of Japan committed to maintaining its policy rate at zero until Japanese consumer prices stabilized or exhibited a year-on-year increase. A potential drawback of using the FOMC's post-meeting statement to influence market expectations is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communication strategy, with the goal of communicating its outlook and policy intentions as clearly as possible.
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the "interest on excess reserves" rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates. However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small. The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points. The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy. Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed's purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit. In normal times the Fed relies heavily on a well-functioning federal funds market to implement monetary policy, so we would want to be careful not to do permanent damage to that market.
A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations. Also, in such a situation, higher inflation for a time, by compensating for the prior period of deflation, could help return the price level to what was expected by people who signed long-term contracts, such as debt contracts, before the deflation began.
