October 18, 2013 Economic Week in Review: Last-minute deal eases tensions for now Concerns rose in the financial markets with the approach of October 17—the day when the U.S. Treasury expected to hit its authorized debt limit of $16.7 trillion. However, an eleventh-hour deal not only extended the Treasurys borrowing authority until February 7 (averting a possible near-term default) but also funded the federal government until January 15, ending a 16-day partial shutdown. Although the deal was met with relief, Washington seems just as divided on spending priorities and how to reduce the deficit, meaning investors will most likely have to endure more political wrangling in coming months. For the week ended October 18, 2013, the S&P 500 Index was up 2.4% to 1,745 (for a year-to-date total return—including price change plus dividends—of about 24%). The yield of the 10-year U.S. Treasury note was down 10 basis points to 2.60% (for a year-to-date increase of 82 basis points). Fed survey confirms economic trajectory The pace of economic expansion was again characterized as modest to moderate in the latest publication of the Federal Reserves Beige Book. The survey of businesses and economists, covering September through early October, indicated that the recovery in the housing industry remained on track. Low inventories of existing homes for sale are helping prices and spurring new construction, while the recent rise in interest rates doesnt seem to be crimping sales too much, as some investors make buying decisions in anticipation of higher mortgage rates. The auto industry remained a bright spot in the manufacturing sector. Employment gains were modest. Respondents were cautiously optimistic about the economic outlook but were hesitant to expand their payrolls given the uncertainty surrounding fiscal policy and implementation of the health care law, but demand for highly skilled workers remained strong. Note that because the survey period ended in early October, soon after the government shutdown began, the full impact of the shutdown on the economy will first be reflected in the next publication of the Beige Book, in early December. While quantitative estimates of the impact of the government shutdown are possible given lost wages, spending, etc., the more important implications are grounded in the uncertainty created by these events, Vanguard economic analyst Andrew J. Patterson said. The spending decisions of consumers and businesses are likely to be impacted, but potentially more important, market participants could start viewing these episodes as a pattern and start to factor this into the prices they charge to lend to the government. Treasury securities are viewed as risk-free assets and serve as the standard on which other lending rates and asset prices, both here and abroad, are based. The impacts of the brinksmanship practiced in Washington may be much further-reaching than fourth-quarter GDP figures suggest. Shutdown delays economic reports Because of the shutdown, expected reports this week on the Consumer Price Index, new residential construction, and industrial production were postponed, as was the release of the Conference Board’s Leading Economic Index, because some of its components are based on government data. The economic week ahead An increased number of economic reports may come out next week as the Labor and Commerce Departments begin publishing ones originally due for release during the shutdown. Currently scheduled reports include existing-home sales on Monday, the September employment situation on Tuesday, new-home sales on Thursday, and an advance estimate for September durable-goods orders on Friday. Notes The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports. All investing is subject to risk, including possible loss of the money you invest. Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuers ability to make such payments will cause the price of that bond to decline. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the funds trading or through your own redemption of shares. For some investors, a portion of the funds income may be subject to state and local taxes, as well as to the federal alternative minimum tax. We recommend that you consult a tax or financial advisor about your individual situation. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Posted on: Fri, 18 Oct 2013 22:51:28 +0000