US Data Does Not Diminish Possibility of QE3

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Investors are feeling more optimistic this morning ahead of what will undoubtedly be a busy and volatile trading week. Not only are there 3 central banks with monetary policy announcements, but Fed Chairman Ben Bernanke will be delivering his semi-annual testimony on monetary policy and the economy Tuesday followed by non-farm payrolls on Friday. In addition, there will be a number of key economic reports from the U.S., Germany, Australia and Canada that could affect the outlook for those currencies.

The most important questioned that investors want answered this week is whether the Federal Reserve is moving in a completely different direction from other central banks. Recent comments from Fed officials including Fed President Bullard who appeared on CNBC this morning suggests that asset purchases could continue beyond June. Although Bullard is not a voting member of the FOMC, monetary policy doesn't need to be black or white or yes or no on QE. Instead of eliminating asset purchases completely, the Fed could opt to gradually wind down their purchases. If Fed Chairman Ben Bernanke suggests that this is even a small possibility tomorrow, the dollar could head even lower. If he emphasizes the need to unwind emergency stimulus however, the dollar could rebound quickly as investors adjust their expectations for monetary tightening.

Personal Income, Spending and Savings

The latest series of mixed economic data isn't particularly supportive of the dollar. Personal income surged by 1.0 percent, the fastest pace of growth in 20 months but personal spending fell short of expectations, growing by a mere 0.2 percent in January. The decline can be partially attributed to higher food and energy costs but the real problem is the labor market and the lack of jobs. Hopefully Friday's non-farm payrolls report will show that this is changing and job growth is slowly improving but in order for the Federal Reserve to feel confident in the labor market, they will need to see a few more months worth of data. Aside from the increase in personal income which is encouraging, the personal savings rate also rose from 5.4 to 5.8 percent the previous month. Normally frugality during a recovery hurts more than it helps the economy but in this case, the increase in savings can be attributed to the surge in incomes. Hopefully this will translate into increased spending in the coming months. The inflation indicators showed a small increase in core prices with the PCE core rising by 0.1 percent. This latest report confirms that inflationary pressures in the U.S. remain muted.

Chicago PMI and Pending Home Sales

Manufacturing activity in the Chicago region was very strong, with the Chicago PMI index rising to its highest level in 27 years. The ISM manufacturing index is due for release this week and based upon the regional numbers, manufacturing activity accelerated across the nation, providing underlying support for the U.S. economy. The details of the Chicago PMI index showed an increase in production, inventories, backlog, and new orders. However the employment component declined which is indicative of slower job growth. Pending home sales on the other hand dropped 2.8 percent last month. Although this decline was only slightly more than economists had anticipated, what made the report very detrimental to the housing market was the revision to the December release which showed sales falling by 3.2 percent instead of the originally reported 2.0 percent rise. Pending home sales are a leading indicator of the housing market and this decline does not bode well for the market's outlook.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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