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News of the Competition (12/18/14)

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  • WASHINGTON (12/18/14)--The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch, Pierce, Fenner and Smith $1.9 million for violating fair pricing and supervisory laws in more than 716 cases of retail customer transactions of distressed securities (MarketWatch Dec. 16). FINRA also has ordered Merrill Lynch, a unit of Bank of America, to pay the affected customers $540,000 for the infractions. FINRA asserts that Merrill Lynch bought notes from Motors Liquidation Co., the name used by General Motors after the company went bankrupt, for prices well below their market value, and then sold them to brokers at, or above, market prices. The government agency also alleges that Merrill Lynch failed to conduct post-trade best execution or fair pricing reviews for any of the transactions, according to MarketWatch. Merrill Lynch has not admitted to or refuted FINRA's findings ...

Patience a key for FOMC in rate-setting process

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MADISON, Wis. (12/18/14)--A change in wording in the statement released by the Federal Open Market Committee (FOMC) Wednesday at the conclusion of its two-day policy meeting could mark a shift in forward guidance in terms of rate setting.

While the FOMC stopped short of taking out the words "considerable time" from its statement when referring to when it will begin to raise interest rates from their near-zero levels, the Fed also inserted the word "patient," which could signal that a rate hike isn't all that far off.  

According to Moody's analysts, there is a precedent for this type of language in FOMC policy statements.

"The Fed has used this language in 2004," said Ryan Sweet, Moody's analyst (Economy.com Dec. 17). "If the Fed follows the same script, the first increase in the fed funds rate won't occur for a least six months."

Federal Reserve Chair Janet Yellen just about said as much in her post-meeting press conference Wednesday.

"At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization," Yellen said (MarketWatch Dec. 17).

A major obstacle that could be keeping pressure on the FOMC to take its time in this decision is the sluggish inflation that has dogged the U.S. economy. Inflation continues to crawl below the Fed's 2% target rate. The Fed largely pinned weak inflation on thinning energy prices.  

While many may focus on the FOMC's use of "considerable time" and "patient" in the statement, meanwhile, Sweet believes another word should also receive attention.

"The Fed used 'transitory' to describe energy prices' impact on inflation," he said. "This is the norm for the Fed, but the central bank needs to be careful. Inflation has been too low for too long, and that has economic costs."

An appreciating dollar, which could put downward pressure on core goods prices, also could be affecting inflation, said Sweet, who added that this new development likely caught the eye of the FOMC as well.

"The Fed noted the mixed message on long-term inflation expectations, but given its assessment, policymakers appear to be putting more stock in survey-based rather than market-based measures," Sweet said.

NEW: Fed remaining 'patient' on rate-hike decision

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WASHINGTON (12/17/14, UPDATED 2:25 p.m. ET)--The Federal Open Market Committee (FOMC) left the words "considerable time" in its policy statement today, potentially signaling that the Federal Reserve may raise short-term interest rates later than currently anticipated.

Analysts have said that removing the words from the statement would have indicated that the FOMC was planning to raise rates sooner, but the Fed said that keeping rates at their near-zero levels remained appropriate.

"In determining how long to maintain this target range, the committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation," said the FOMC in its statement following the conclusion of its two-day policy meeting. "Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy.

"The committee sees this guidance as consistent with its previous statement, that it likely will be appropriate to maintain the 0% to 0.25% target range for the federal funds rate for a considerable time following the end of its asset-purchase program in October, especially if projected inflation continues to run below the committee's 2% longer-run goal."

The Fed added, however, that if incoming economic data points to faster economic progress, the committee may then hike interest rates sooner than they presently expect.

In assessing the overall economy, the Fed noted that the labor market continues to make improvements, with solid job gains and a lower unemployment rate recorded of late. Further, household spending continues to climb and business fixed investment is rising as well.

The housing market continues to make slow progress, though.

"The committee sees the risks to the outlook for economic activity and the labor market as nearly balanced," the FOMC said. "The committee expects inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate."

Fed walkup: 'Considerable time' will tell

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WASHINGTON (12/17/14)--The intentions of the Federal Open Market Committee (FOMC) on when it plans to begin nudging up short-term interest rates may be revealed this afternoon when it releases its statement at the conclusion of its two-day policy meeting.

Should the words "considerable time" appear in that statement, it could signal that sluggish inflation has persuaded the Federal Reserve to push back its timeline on when it will begin raising short-term interest rates.

If the Fed leaves those words out, however, chances are the FOMC is giving a heads up to the market that it's gearing up to raise rates in the middle of next year, as many economists have predicted it would.

"It's reasonable to think about taking that language out now," Jim O'Sullivan, economist with High Frequency Economics, told USA TODAY (Dec. 16).

Policymakers are "likely to start trying to reshape market expectations gradually" rather than surprising investors with an abrupt increase in rates, added Drew Matus, economist for UBS (USA TODAY).  

Market conditions, which will weigh heavily on the Fed's decision on when to raise rates, largely have proven favorable in recent months, as the economy grew by 3.9% in the third quarter, U.S. employers continue to add jobs at a healthy clip and the unemployment rate continues to taper.

But then there's that pesky inflation.

Bottomed-out oil prices and a weakening global economy have pinned down inflation in the United States below the Fed's annual 2% target, which could give the FOMC reason to hold off on any rate increases (USA TODAY).

O'Sullivan told USA TODAY, however, that because the Fed relies on "core" inflation, which leaves out food and energy costs, inflation could still rise to an acceptable level for the FOMC.

And if gas and energy prices continue to flounder, consumer spending may reap the benefits, which could boost economic growth and encourage the Fed to raise rates just the same.

Non-mortgage credit balances at 5-year high: Equifax

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ATLANTA (12/16/14)--Non-mortgage credit balances in the United States topped $3.1 trillion in November, the highest level in more than five years, according to Equifax.

Auto-loan balances climbed 9.6% annually in November to $965 billion; retail-issued credit card balances jumped 4.8% to $71 billion; and bank-issued credit cards increased 4.7% to $611.7 billion.

The total balance of non-mortgage write-offs through November was $73.4 billion, the second-lowest level in eight years, according to Equifax. Further, the total balance of home-finance write-offs through November was $91.2 billion, also the second-lowest in eight years.

"The Great Deleveraging has clearly ended and U.S. consumers are back in the borrowing business, but how they borrow has greatly changed from prior to the Great Recession," said Amy Crews Cutts, senior vice president/senior economist at Equifax. "Today, while auto loans make up 30.9% of non-mortgage consumer debt--just as they did in December 2007 at the recession's start--student loans have grown from 20.2% to a whopping 37.3%, and bank- and retailer-issued credit cards are down to 21.9% of consumer debt from 31.4%.

"One way to read this change is that consumers now value investment (in their education and durable goods like cars) over immediate consumption, which is good for our economy over the long run," Crews Cutts said. "But, with the exception of new-car production, sluggish consumption slows economic growth in the short term, partially explaining the slower-than-hoped-for economic recovery."

Additional data from the report:
  • The total number of auto loans outstanding year-to-date in November topped 70 million, the highest level in five years;
     
  • The total number of new auto loans originated between January and September came in at 19.2 million, a 4.7% jump annually;
     
  • The total amount of new credit originated year-to-date in September was $183.9 billion, a six-year high and a 25.9% increase over the same period last year;
     
  • The total number of new cards issued year-to-date in September was 37.7 million, also a six-year high and a 20.1% increase over the same period last year;
     
  • Delinquent first mortgages represented 4.54% of outstanding balances in November, down from 5.87% the previous year; and
     
  • The total balance of seriously delinquent first mortgages, those 90 days past due or in foreclosure, was $198.8 billion in November, a decrease of more than 29.8% the previous year and the lowest level in more than five years.

Consumer confidence reaches 8-year high

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WASHINGTON (12/15/14)--Consumer confidence as tracked by the University of Michigan's consumer sentiment survey jumped by five points in December up to a reading of 93.8, the highest number recorded in eight years ( Economy.com Dec. 12).

Positive assessments of current finances for consumers and optimism in the economy over the coming months helped drive up the index's top-line measure, which comfortably surpassed expectations, according to Moody's analysts.

"Even though the upward trend in confidence has been in place since late 2013, the past several months mark a sharp acceleration in improvement," said Nate Kelley, Moody's analyst ( Economy.com ). "Lower gasoline prices are giving consumers some financial breathing room, which may have played a role in a stronger than expected rise in retail sales for November.

"This has coincided with job growth that has been strong enough to pull the unemployment rate significantly lower over the past year."

The economic outlook subindex climbed 6.2 points to 86.1 from 79.9, its highest reading since early 2007 and the largest increase since May 2013.

The current economic conditions index climbed 3 points to 105.7, also a multiyear high.

Despite bottomed-out oil prices, consumers forecasted prices will rise 2.9% over the next 12 months, a slight increase from last month's estimate of 2.8%. Over the next five years, consumers see prices rising 2.9% per year, up from the 2.6% that was predicted last month.

Nov. retail sales exceed expectations

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WASHINGTON (12/12/14)--Retail sales bumped up 0.7% in November, far outgaining the performance many analysts had expected for the month.

While auto dealers again experienced a strong month, improvements in retail were widespread among many segments, according to numbers released by the Census Bureau Thursday (Economy.com Dec. 11).

Excluding autos, overall sales climbed 0.5%, buoyed by better sales from building supply stores, apparel stores, nonstore retailers and department stores.

Miscellaneous retail stores were the only segment that failed to post a positive month.

"Retail sales were surprisingly strong in November," said Scott Hoyt, Moody's analyst (Economy.com). "Not only did growth exceed expectations, but upward revisions to the prior two months put sales at a notably higher level than anticipated."

Hoyt said that the weak areas in sales, such as at grocery stores, were likely impacted by low oil prices.

Annual growth in retail sales accelerated to 5.1%, which is the fastest pace seen in nearly a year and a half, Moody's said. Year-over-year sales have been fueled by auto dealers and nonstore retailers.

Meanwhile, the National Retail Foundation (NRF) reported Thursday that holiday shoppers have been taking advantage of discounts and early sales, which helped push spending higher in November.

Excluding automobiles, gas stations and restaurants, retail sales climbed 0.6% in November and 3.2% annually, according to the NRF's numbers.

The NRF also estimates that holiday sales will post a 4.1% increase over last year's numbers.

"As we've said all along, retailers are optimistic that they will see healthy holiday sales gains this year," said Matthew Shay, NRF president/CEO. "November sales results confirm that optimism, and we are steadfast in our belief that we are on track to reach the 4.1% growth in holiday sales."

The Credit Union National Association in its holiday shopping survey conducted with the Consumer Federation of America forecasted similar subdued increases in growth this year (News Now Nov. 25).