The equity markets rallied for a second consecutive day while the dollar was able to mount a late day rally, regaining some of yesterday’s losses. The S&P 500 consolidated most of the day and was able to gain 4 points to close at 1099.
The pound modestly weaker after disappointing jobs data and even though the MPC voted unanimously to pause on the QE front and to leave rates on hold in February. Given last week’s definitely dovish BoE Quarterly Inflation Report, one could have expected a couple of members to vote for an extension of the asset purchase program and indeed the gilt market sold off in a knee-jerk reaction to the news. The majority argued that adding to the size of the Q/E program now might increase the chance of unwarranted increases in asset prices with a pause needed to make an assessment and with policy makers continuing to note that considerable headwinds remain in the economy. That UK economic predicament was captured by the January jobless claims figures today which rose 23.5k on the month vs. -10K expected and more than offsetting a -9.6k decline previously. Additionally, December average earnings are running at just 0.8% 3mths y/y, vs. 0.9% expected and unchanged from November which should support the BoE’s view that gains in CPI are temporary.
The Jan 27 FOMC minutes were largely superseded by Bernanke’s testimony last week although the notes made clear policy makers had differing views. Hoenig, a voting member, was the only policy maker to dissent on use of the phrase “extended period.” The minutes showed he favored adopting a “modestly higher rate soon.” Several members argued for shrinking assets sooner rather than later. While all members agreed assets should be shrunk “over time”, several members did advocate shrinking assets in the “near future.” Plosser, currently a non-voting FOMC member and speaking as the minutes were released, expressed this view. This underscores a point. Not all voting members are hawks. Other FOMC members including Evans, who is currently a voting member, have advocated a more dovish approach in recent speeches arguing for expanding purchases if necessary. Diverging views become a focus as policy begins to shift but in this case, the minutes have been superseded by Bernanke’s testimony where the Chairman laid out an exit strategy that included a discount rate hike to move the spread between the discount and Fed funds target toward a more normal spread (100 bp prior to the crisis) and a warning that Fed funds might become a less reliable indicator of the Fed’s policy stance “for a time” with the Fed instead using rates on reserve requirements to reflect policy.
In US economic news, Housing starts climbed 2.8% to a seasonally adjusted 591,000 annual rate compared with the prior month as builders recovered from a bout of bad weather, according to the Commerce Department. However, new building permits dropped, a sign the housing sector is improving slowly.
Federal Reserve reported that industrial production rose 0.9% in January as car and parts output surged. Economists surveyed had expected a 0.8% increase. Car and parts output rose 4.9%. Excluding autos, production in all other industry increased 0.9%. Utilities output rose by 0.7%. Utilities capacity use increased to 83.1% from 82.7%.