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Do last week’s economic releases support the Fed’s tapering stance?

Do last week’s economic releases support the Fed’s tapering stance? (Part 1 of 10)

Do last week’s economic releases support the Fed’s tapering stance?

The FOMC meeting

In a data heavy week, the most important event for financial markets last week, was the U.S. Federal Reserve’s Federal Open Market Committee (or FOMC) meeting held on March 18-19. At the end of the meeting, the Fed announced further tapering in its monthly asset purchases of longer-term Treasuries (TLT) and agency-backed securities (MBB), by $10 billion, to $55 billion per month. The Fed also provided some guidance on when it expected to raise the Fed funds rate (in 2015). The Fed funds rate has hovered around 0-0.25% since December, 2008.

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Another economic indicator released last week, which is of great relevance to debt markets, is the Treasury International Capital (or TIC) report, which released on Tuesday, March 18. The TIC reported on cross-border portfolio investment flows and positions between the U.S. and foreign residents for the month of January, 2014. The TIC reported a net inflow in net foreign acquisitions of the long-term and short-term securities and banking flows of $83.0 billion in January, 2014, up from December’s revised net outflow of $126.7 billion. Of this, the net foreign private inflows were $115.9 billion, and the net foreign official outflows were $32.8 billion.

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Reduction in monthly bond purchases of longer-term Treasuries and agency-backed securities by the U.S. Fed, will have a direct impact on the demand and prices for fixed income ETFs investing in Treasuries and agency-backed securities. A reduction in purchases would, other factors remaining constant, reduce prices for these securities due to lower demand.

The iShares 20+ Year Treasury Bond ETF (TLT) is one of the ETFs investing in long-term Treasuries. An ETF with investments in agency-backed securities is the iShares Barclays MBS Fixed-Rate Bond Fund (MBB), which tracks the Barclays Capital U.S. MBS Index. The Index measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA and FHLMC.

Four economic releases pertaining to the housing sector released last week

The National Association of Home Builders (or NAHB)/Wells Fargo (WFC), Housing Market Index (or HMI) was released on Monday, March 17. After February’s record 10-point month-on-month drop to 46, The HMI increased by just 1 point to 47, as buyers, mostly of the first-time variety, kept away.

Housing starts data for the month of February was released on Tuesday, March 18. Housing starts came in at a seasonally-adjusted annual rate (or SAAR) of 0.907 million, in line with consensus estimates. However, housing permits increased to a better than expected SAAR of 1.018 million in February.

Mortgage purchase applications data for the week ended March 14, was released on Wednesday, March 19. Mortgage applications for both purchases and refinancing were down by 1% for the week.

Existing home sales data for February, was released on Thursday, March 20, by the National Association of Realtors. Existing home sales were down by 7% year-on-year (read part 8 of this series for a detailed analysis of this indicator).

ETFs which specialize in investing in residential construction companies, include the iShares U.S. Home Construction ETF (ITB), which tracks the performance of the Dow Jones U.S. Select Home Construction Index. The index measures the performance of the home construction sector of the U.S. equity market. Top ten holdings for ITB include PulteGroup (PHM) and Home Depot (HD) with 9.99% and 3.9% of assets, respectively.

The purpose of the series is to discuss the economic data released on Thursday, March 20 and Friday, March 21, and their implications on financial markets. Part 2 is a précis of the other indicators which were released between Monday to Wednesday last week.

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