Market and economic update: The Fed concludes its quantitative easing program

The biggest news last week came from central banks, with the Bank of Japan (BOJ) delivering a surprise expansion in its quantitative easing (QE) program. Further supporting risk-taking in the Japanese economy was an announcement by the Government Pension Investment Fund that it would slash its target bond holdings by more than 40% and double its equity holdings.

Inflation readings for Japan have been slipping since the consumption tax increase midyear. Easier monetary policy and rebalancing of government investment funds should provide some support for risk assets and inflation in Japan, although at the expense of a weaker yen. Japan was not alone in modifying monetary policy. Sweden cut short-term interest rates to zero in an effort to fight deflation, while central banks in Brazil and Russia increased interest rates to battle weakening currencies. Price pressures have been easing around the world, giving central banks room to act to support economies and prices.

In the United States, the Federal Reserve (Fed) concluded its QE program in October, although it may be some time before it begins to normalize short-term interest rates. Economic data in the United States remain positive as illustrated by improving consumer confidence. Gross domestic product (GDP) growth in the third quarter grew 3.5%, personal income rose 0.2% for September, and the Employment Cost Index (which is correlated to wage gains) grew 2.2% for the year ending September. Durable goods orders for September were the weak spot, dropping 1.3%.

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The durable goods report has been adjusting to the record strength in aircraft orders in July, while data for the third quarter seem clearly weaker than the recovery in the second quarter. We seem to have entered the fourth quarter at a modest level of orders activity. This week, purchasing manager survey data will give us a picture of the health of U.S. manufacturing activity, while the October employment report looms on Friday. At this writing, consensus expectations seem to center around nonfarm payroll gains of around 230,000 jobs and for the unemployment rate to remain unchanged at 5.9%. We believe the consistent gains in employment are a strong indication of improving health for the U.S. economy, and we expect this trend to remain intact into the new year.

For more information, go to https://reserve.usbank.com/insights/market-economic-update-11-03-14.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank. 

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