The tail of the Euro zone wagged the dog this week as economically small Cyprus drove the financial news cycle. Cypriot banks, under pressure from failing loans to Greek and other businesses, are dependent on support from the European Central Bank. The ECB has threatened to stop providing emergency liquidity support unless Cyprus agrees to a bailout brokered by the European Union and the International Monetary Fund. Two key takeaways: (1) The EU has a long way to go before the banking sector is stabilized, and (2) the potential for political processes to get in the way of much needed structural reforms throughout the European Union remains high.
U.S. economic data this week showed ongoing momentum in the housing sector in the still-early days of fiscal tightening. Housing starts gained 0.8 percent to hit a 917,000 unit annual rate in February. Building permits are still leading starts, up 4.6 percent in February to a 946,000 unit rate. Existing home sales for February also increased by 0.8 percent to a 4.98 million unit annual rate. The supply of existing home on the market ticked back up to 4.7 months’ worth, breaking a string of tightening supply reports dating back to last April. The supply of existing homes is moderately tight and that is good news for the new home market and for builders. The median price of an existing homes is up 11.6 percent over the year ending in February according to the National Association of Realtors.
The Conference Board’s Leading Economic Index for the U.S. increased by 0.5 percent in February, the third consecutive moderate increase since the index stalled last November. The strongest components in February were interest rate spread, building permits and the credit index. The index does not explicitly track federal spending.
Initial claims for unemployment insurance for the week ending March 16 increased by 2,000 to hit 336,000. The level of initial claims now looks like it has stepped down after it stalled around 370,000 for much of last year. UI claims through mid-March are consistent with payroll job gains of about 185,000 for the month.
The Federal Reserve left monetary policy unchanged at the regularly scheduled meeting of the Federal Open Market Committee this Tuesday and Wednesday. Expect more of the same at the next meeting over April 30/May 1. The next step for the Fed will be to give some forward guidance about the duration, scope or a possible wind down of its current program of quantitative easing, known as QE3. Forward guidance on QE3 may come by late summer.
Congress kicked the debt ceiling can down the road again. Legislation passed by both houses this week extended the funding for the federal government until the end of September. The bill does marginally blunt the impact of fiscal tightening by delaying the threat of a federal government shutdown until late this year, and by giving federal agencies more discretion in how to apply the budget cuts required by the sequester that took effect March 1.
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