Market Overview

Fed's Beige Book Downplays Recovery

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The Federal Reserve released the Beige Book Wednesday, a compilation of regional and national economic news. The data is current as of July 9, 2012. The comments from the regional Fed Presidents and the Governors follow Chairman Bernanke's testimony on Capitol Hill and reiterates the Fed's dim views of the U.S. economy.

In the most recent Beige Book, the Fed noted that employment growth remained tepid across most districts and that manufacturing growth has slowed in most districts. Also, the Beige Book noted that retail sales had slowed following comments from Chairman Bernanke in his testimony that the warm weather earlier this year may have pulled sales forward. However, the Fed also noted that housing market reports have been largely positive and that loan demand grew modestly.

Macro-driven assets were largely unchanged on the release of the Beige Book, as recent economic data has pointed to a manufacturing slowdown across the country. The dollar index was largely unchanged on the news, rising a mere 0.017 to 83.067. U.S. 10-year yields fell slightly to 1.4756 percent and 2-year yields fell modestly as well. Major indices were also largely unchanged when the Beige Book was released.

Markets have been looking for signs of further Fed easing as data has continued to soften. However, as written Tuesday on Benzinga, inflation expectations have not fallen far enough for the Fed to launch a third round of quantitative easing. Medium-term inflation expectations, as measured by the 10-year breakeven rate, sit above 2 percent, meaning that inflation is expected to trend slightly above the Fed's target. As long as this is the case, QE3 is seemingly out of the question as it is an anti-deflation policy.

 

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