Economy Watch: Consumers a Bit More Grumpy in January; Fed Still on the Tapering Track? Asian Markets Drop, Euro-Markets Static

The Reuters/University of Michigan consumer sentiment index dropped 2.1 points from the end of December. The Wall Street Journal reported that the Federal Reserve is “on track” to announce another reduction in QE3 bond-buying. In Asia, shares were generally down on Monday. In Europe, Germany's DAX dropped 0.3 percent,

The Reuters/University of Michigan consumer sentiment index came in at 80.4 at mid-month January, which was a drop of 2.1 points from the end of December, though still an improvement from 75.1 at the end of November and 72.0 at mid-month November. In fact, the reading was the second-highest since last summer, and generally higher than most sentiment readings since the beginning of the recession.

The current conditions component of the index took a dive of 3.4 points to 95.2. That might mean that consumers are taking a more of a breather than usual in spending during the transition from December spending patterns (which are gung ho) to January (which are less so). The expectations component of the report is also down, by 1.2 points to 70.9.

Consumers seem to be out of the habit of expecting much in the way of inflation, with one-year inflation expectations unchanged at 3.0 percent. Expectations for inflation five years in the future are also fairly meager, coming in at 2.9 percent. The University of Michigan’s Consumer Survey Center queries 500 U.S. households each month about their financial conditions and attitudes toward the economy.

Fed Still on the Tapering Track?

The Wall Street Journal reported on Monday that the Federal Reserve is “on track” to announce another reduction in QE3 bond-buying, which is currently $75 billion for the month. The most commonly cited size for the next cut is $10 billion, as the Fed did from December to January. The announcement, one way or the other, will come after the FOMC’s Jan. 28-29 meeting.

Prognosticators are already predicting unintended consequences from tapering, and not just for this country. As tapering proceeds, U.S. interest rates will eventually rise, and so investors may pull out of certain places to put their money back into the U.S. East Asian economies, for instance, could see a capital outflow that would depress the area’s currencies, according to the “World Economic Situation and Prospects 2014” report published recently by the UN Department of Economic and Social Affairs.

“Tighter liquidity conditions and higher global and regional interest rates could pose considerable challenges, particularly for countries with high levels of household rates such as Malaysia, the Republic of Korea and Thailand, ” the report notes.

Asian Markets Drop, Euro-Markets Static 

Wall Street was closed for the MLK holiday on Monday. In Asia, shares were generally down on Monday, though by Tuesday morning they started to bounce back. The Nikkei 225 dropped about 0.6 percent on Monday and the Shanghai Composite was down 0.7 percent, while Hong Kong’s Hang Seng was off 0.9 percent and Australia’s S&P/ASX lost 0.2 percent.

One reason given for the Asian declines was the most recent official report about the Chinese economy, which stated the it grew at 7.7 percent during the fourth quarter of 2013, down from 7.8 percent in the third quarter. That’s high growth by developed-world standards, but by recent Chinese standards, a slowdown.

In Europe, Germany’s DAX dropped 0.3 percent, with Deutsche Bank leading the decline (down 5.4 percent), because the banking giant took an unexpected loss in the fourth quarter. Other Euro-markets didn’t seem to care much about German difficulties. The UK’s FTSE 100 was up 0.1 percent, while France’s CAC 40 was down 0.1 percent.