As investors vacillated about the impact of developments in Greece, together with the uncertainty of strong fourth-quarter economic data possibly not carrying over to the first quarter, stock markets experienced two sharp sell-offs and two rebound rallies, limping to small gains on Friday but ending the week modestly down.

Renewed fears over Greece's debt woes, disappointing German business confidence statistics and lower-than-expected US consumer confidence data tempered investor optimism for risky assets, triggering haven demand for government bonds and the Japanese yen.

Fed Chairman Ben Bernanke provided some support for stock markets on Wednesday by indicating in his testimony to the US House Financial Services Committee that the fed fund rate will remain at exceptionally low levels for an extended period. However, the flip side of the coin is his gloomy picture of the economy still battling high unemployment and a weak housing sector.

"Greece hasn't gotten so much press since 146 BC when the Romans took over," said Paul Kasriel (Northern Trust). In news after the close of the markets, the Financial Times reported: "Germany's biggest banks are looking at a rescue plan for Greece under which they would buy Greek debt backed by financial guarantees from Berlin. One senior German bank official said serious thought was being given to a plan for the German government, working through KfW, its development bank, to issue guarantees to banks that bought Greek debt."

Source: Patrick Blower, Guardian

The past week's performance of the major asset classes is summarized in the chart below - a set of numbers indicating that a degree of risk aversion has crept back into financial markets. Interestingly, unlike equities, both investment-grade and high-yield corporate bonds ended the week in the black. "We believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk," Andrew Jessop, high-yield portfolio manager at Pimco, said in a note on the company's website (via MoneyNews).

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

It was essentially a flat week, with the MSCI World Index declining by 0.1%, but the MSCI Emerging Markets Index managing to eke out a positive return of 0.3%. With the Chinese returning from the lunar holiday, Hong Kong (+3.6%) put in one of the better performances among important markets, whereas mainland China (+1.1%) also closed the week in the black.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 9.4% higher. Mexico could be the next country to eliminate the bear market losses.

Top performers among stock markets this week were Ukraine (+4.5%), Greece (+3.7%), Hong Kong (+3.6%), Cyprus (+3.2%) and Thailand (+3.0%). At the bottom end of the performance rankings, countries included Turkey (?6.8%), Malta (-5.7%), Austria (-5.2%), Argentina (-4.9%) and Latvia (-4.2%). Turkey suffered from tensions between the government and the military. Debt-ridden European countries such as Italy (-3.2%), Spain (-3.2%), Ireland (-3.2%) and Portugal (-2.1%) featured strongly at the bottom end of the performance ranking.

Of the 96 stock markets I keep on my radar screen, 33% recorded gains, 60% showed losses and 7% remained unchanged. The performance map below tells the past week's somewhat bearish story.

Emerginvest world markets heat map

Source: Emerginvest (Click here to access a complete list of global stock market movements.)

Eight of the ten economic sectors of the S&P 500 Index closed lower for the week, with Financials and Consumer Discretionary the only two sectors not under water. (Who would have guessed the Conference Board's Consumer Confidence Index would fall to its lowest level since July 2009 on Tuesday?)

Source: US Global Investors - Weekly Investor Alert, February 26, 2010.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+4.3%), iShares MSCI Thailand (THD) (+3.9%) and CurrencyShares Japanese Yen (FXY) (+3.1%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey (TUR) (-8.8%), Claymore/MAC Global Solar Energy (TAN) (-7.2%) and United States Natural Gas (UNG) (down 5.1%).

Referring to a regulatory report released on Tuesday by the Federal Deposit Insurance Corp (FDIC), the quote du jour this week comes from Addison Wiggin, co-author of Financial Reckoning Day Fallout and The New Empire of Debt. He said in a column on The Daily Reckoning site: "The FDIC is even more broke than it was three months ago. The fund the FDIC uses to 'insure' your bank account went $20.9 billion in the red during the fourth quarter of 2009. That's more than twice the deficit reported when the fund first entered negative territory in the previous quarter. Incredibly, the FDIC is still trying to reassure us that all is well because it's collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion - barely twice the amount of the current deficit. Yeah, we feel better.

"On top of that, the FDIC's list of 'problem banks' grew during the fourth quarter from 552 to 702. That's the highest number since 1993 (when, we presume, more independently owned banks were around, so it's worse than it sounds). Hmmm, let's see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012. Another tidbit from the FDIC's report: Bank lending last year dropped at the biggest clip since 1942. Of course, in that year, the entire economy was shifting to a war footing. So it's safe to say what we're seeing now is another unprecedented postwar occurrence."

Next, a quick textual analysis of my week's reading. This is a way of visualizing word frequencies at a glance. "Bank", "debt", "economy", "Fed", "rate" and "market" all featured prominently, but it was somewhat surprising to see "China" commanding more media mentions than "Greece".

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index, the indices in the table are all trading below their 50-day moving averages, but all the indices are still above their respective key 200-day moving averages. However, a red light is starting to flash regarding the Shanghai Composite Index, which is within striking distance (20 basis points) of this key support line.

Commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: "The Index hit minor resistance a few trading sessions back near the 1,112 level. Until this level is taken out the near-term directional bias remains neutral. Lower down, the key level to watch is in the 1,072 area. This support level represents a much more significant uptrend line and if violated would suggest a bigger correction.

"Sentiment indicators are neutral at present, which is a positive, while market breadth remains a mixed bag. Clearly the recent trading activity suggests volatility will be more present in day-to-day trading than over the past few months."

On the topic of charts, when considering S&P 500 monthly data, going back to 1998, three momentum-type oscillators (RSI, MACD and ROC) all still signal a bullish trend (see chart below). According to Yahoo Finance - Tech Ticker, Barry Ritholtz (The Big Picture) is not as bullish as he was last March when he called the market bottom, but is sticking with stocks. "The easy thing to do now would be to go to cash," he said, "[But] I rarely find the easy trade is the one that makes you money." (Incidentally, the long-term chart for US government bonds is in bearish mode.)

Source: StockCharts.com

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, said: "Let's face it, the surprise two months into the year is that the stock market is down more than 1% and 10-year Treasury yields are also down 20bps. It is still early in the year to be sure but it also seems clear that the economic data are starting to show some fragility. The S&P 500 has done little more than hover around the 1,100 mark now for six months in what can only be classified as a major topping formation. The VIX index is at 20, not 40; market vane sentiment is closer to 60 than 30; the US dollar is strong, not weak; policies are moving tighter, not easier; and the government is now aiming to curtail the banks whereas a year ago it was all about saving them.

"With a V-shaped earnings recovery already priced in and economic houses, like MacroEconomic Advisors, calling for 4% GDP growth for 2010, it certainly is difficult to highlight where the upside surprises for the market are going to be."

From across the pond, David Fuller (Fullermoney) adds the following perspective: "Do we have a real crisis today? It is real enough for Southern European countries and obviously heightens sovereign debt concerns from Greece to the USA via the UK, but is this another global crisis? I do not think so, at least not yet although the OECD countries' problems are far from resolved.

"The loss of upside momentum by most stock markets and many commodities, including precious metals, clearly indicates that global investors have reduced leveraged exposure in the last three months. Whether this is a normal correction (our previously stated 40% possibility) or likely to become a self-feeding and more significant pullback (also a 40% possibility) is hard to gauge, but action near the 200-day moving averages will be revealing. Even in the latter instance, I do not think the global economic background justifies a resumption of bear markets (20% possibility), which were discounting near-depression conditions between 4Q 2008 and 1Q 2009."

I side with Fuller on his conclusion, but am also cognizant of the 12-month momentum of the S&P 500 narrowly tracking the US GDP-weighted PMI (see graph below). Current levels of the S&P 500 indicate the market is expecting a GDP-weighted PMI in excess of 60.0 vs a current level of 52.3. If the S&P 500 maintains its current levels around 1,100, the 12-month momentum will drop to 39% at the end of March and 27% at the end of April this year. Even this drop in momentum requires the GDP-weighted PMI to rise to 55 and higher. Although not impossible, it seems improbable given the sub-par economic recovery. It can therefore be deduced that the US equity market is somewhat overpriced even if the GDP-weighted PMI should improve to 55. Understandably, Marc Faber suggests (via a Financial Times interview) "investors should make 2010 the year of 'capital preservation'".

Source: Plexus Asset Management (based on data from I-Net Bridge).

For more discussion on the economy and financial markets, see my recent posts "Montier: Was it all just a bad dream? Or, ten lessons not learnt", "Barry Ritholtz sticks with stocks, especially emerging markets", "Q4 earnings in perspective", "Face to face with Marc Faber" and "Is the credit malaise really over?" (And do make a point of listening to Donald Coxe's webcast of February 26, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those readers not doing so already, you can follow my "tweets" by clicking here. You may also consider joining me as a friend on Facebook.

Economy
"Business sentiment has improved markedly since hitting bottom about a year ago. This improvement has been about the same across the globe, with South Americans somewhat more optimistic and North Americans somewhat less so," according to the results of the latest Survey of Business Confidence of the World by Moody's Economy.com. Businesses are most upbeat when responding to broader questions about current conditions and the outlook into this summer, but remain cautious when responding to specific questions regarding the strength of sales, pricing, inventories and hiring.

Source: Moody's Economy.com

Meanwhile, the Ifo Business Survey for industry and trade in Germany clouded over somewhat in February. For the first time in ten months, the business climate index has not risen, blaming especially the situation in retailing, which experienced a setback in February. On the whole, the firms have assessed their current business situation somewhat more unfavorably than in the previous month.

Source: Ifo Business Survey, February 23, 2010.

A snapshot of the week's rather mixed US economic reports is provided below. (Click on the dates to see Northern Trust's assessment of the various data releases.)

Friday, February 26
• Existing home sales and inventories disappoint
• Minor revisions of Q4 real GDP

Thursday, February 25
• Have durable goods orders and shipments turned the corner?
• Total continuing claims remain at elevated level

Wednesday, February 24
• Chairman Bernanke repeats "Fed fund rate to remain exceptionally low for an extended period"
• Sales of new homes post new record low
• As Greece goes, so goes the US?

Tuesday, February 23
• Consumer confidence slips in February
• Case-Shiller Home Price Index records seventh monthly gain

Monday, February 22
• Fed's Yellen underscores that removing monetary accommodation now is inappropriate
• Chicago Fed Index advances in January

Referring to Fed Chairman Bernanke's testimony, Asha Bangalore (Northern Trust) said: "The most important message from Chairman Bernanke's testimony is that the federal fund rate will be held at 0%-0.25% for an extended period. In light of the higher discount rate (0.75% vs. 0.50%) announced on February 18, 2010, market participants obtained confirmation from the Chairman that the change in the discount rate was a removal of emergency accommodation put in place to address the financial crisis and not a sign of tightening of the monetary policy stance."

"I don't think the Fed dares increase the fed fund or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver," Bill Gross of Pimco told Reuters (via MoneyNews).

In related news, the Treasury said on Tuesday that it would bolster its Supplementary Financing Program by selling $200 billion in short-term debt and storing the proceeds at the central bank, thereby helping the Fed remove reserves from the financial system.

Summarizing the growth outlook, Bangalore said: "Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with the virtuous cycle of real and financial recovery working together to lift economic growth."

Bespoke highlights a daily Life Evaluation Poll conducted by Gallup.com and Healthways in which participants are asked whether they are "thriving", "struggling" or "suffering". As shown below, 56% now say they're thriving, while 41% say they're struggling (3% are suffering, which is not shown on the chart). "These readings are at just about the widest spread we've seen since the markets' recovery began," remarked Bespoke.

Source: Bespoke, February 26, 2010.

Week's economic reports
Click here for the week's economy in pictures, courtesy of Jake of EconomPic Data.

Click here for a summary of Wells Fargo Securities' weekly economic and financial commentary.

Next week sees interest rate announcements by the Bank of England (BoE) and the European Central Bank (ECB) (Thursday, March 4). In addition, US economic data reports for the week include the following:

Monday, March 1
• Personal income
• Personal spending
• PCE prices
• Construction spending
• ISM Manufacturing Index

Tuesday, March 2
• Auto sales
• Truck sales

Wednesday, March 3
• Challenger job cuts
• ADP employment
• ISM Services Index
• Fed's Beige Book

Thursday, March 4
• Jobless claims
• Productivity
• Factory orders
• Pending home sales

Friday, March 5
• Nonfarm payrolls
• Consumer credit

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source:Wall Street Journal Online, February 26, 2010.

Final words

Sam Stovall, chief investment strategist for Standard & Poor's Equity Research Services, said: "If everyone is forecasting something, then you know it won't come true." (Hat tip: Charles Kirk.) Let's hope the news items and quotes from market commentators included in the "Words from the Wise" review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That's the way it looks from Cape Town with its sun-drenched days.

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Source: Adam Zyglis, Comics.com

Real World Economics Review Blog: Greenspan, Friedman and Summers win Dynamite Prize in Economics
"Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first - and hopefully last - Dynamite Prize in Economics.

"They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

"More than 7,500 people voted - most of whom were economists themselves - from the 11,000 subscribers to the real world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast.

"This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, 'Black Swan' event. In reality, the public perception that economic theories and policies helped cause the crisis is correct."

Source: Real World Economics Review Blog, February 22, 2010.

BCA Research: Sowing the seeds of the next fiscal crisis?
"Mushrooming government indebtedness has reemerged to the forefront as a major issue. "Global policymakers learned from the volatility during the first half of the 20th century: when faced with an adverse economic shock, the natural tendency for a modern economy with leverage is to deflate and undergo an Austrian-style cleansing process. Thus, there is an incentive for authorities to reflate each time economic and financial problems break out, encouraging a further buildup of debt and leverage in the economy (i.e. push today's problems forward to the next generation).

"We have coined this the Debt Supercycle. Unfortunately, the dramatic increase in the policy response needed to end the current recession suggests that the Debt Supercycle is nearing an end. In fact, we would argue that the household sector in the US, UK, and many parts of the euro area have already moved beyond their natural debt ceilings, due in part by lax bank lending standards in recent years.

"Given that authorities have reached the limit of their ability to convince households to take on more leverage, governments have instead been forced to leverage themselves to prevent a deflationary economic adjustment. In addition, the nature of the synchronized global downturn meant that substantial currency depreciation was not a viable reflation option for policymakers. As such, monetary and fiscal policy had to do the heavy lifting. Sizable deficits were a necessary evil if authorities wanted to avoid a sustained period of debt-deflation."

Source: BCA Research - Daily Insights, February 26, 2010.

David Fuller (Fullermoney): Concentrate long-term investments in low risk countries
"There has been a great deal of discussion in the financial press about whether Greece will successfully navigate the crisis it now finds itself in, if the Eurozone will survive a sovereign debt default should one occur and if there is a risk of contagion for countries such as the UK, Japan and the US. These are all important questions which we will have definitive answers for in the coming months and years but to my mind there is a more important question that needs to be addressed first.

"All the issues facing these governments are in essence related to a problem with too much debt and leverage and not enough tax receipts to pay it down. The questions so far have focused on how one country or another might survive this crisis but from the perspective of a judge at an international beauty contest do we want to invest in these countries at all since there are plenty more where these problems are relatively minor if they exist at all?

"Commodity producers such as Australia and Canada have come through this crisis comparatively unharmed. Most of the others are primarily in the so-called emerging markets. Brazil is now a net creditor, China has the biggest foreign currency reserves in the world. Large numbers of countries in Latin America and Asia run trade surpluses. If we look at the world with a broader perspective we see clearly where risk and leverage are concentrated.

"The outcome of the major challenges facing the US, UK, Eurozone and Japan are crucial because of the effect they have on the global market. However, we do not have to invest in the debt, currencies or equities of these countries. Others are better equipped to deal with these issues from a position of strength. They have shown to be credible managers of their economies in a truly testing era and it is surely in these countries one should concentrate long-term investments."

Source: David Fuller, Fullermoney, February 24, 2010.

Financial Times: Experts eye possible Greek bail-out
"As Greece battles to stop its public finances from drowning in debt, technical experts in eurozone capitals are already looking at the shape of a possible bail-out - despite a chorus of governments insisting that no plans for such a move exist.

"Even Berlin has become so worried about the stability of the euro - and of German banks holding Greek debt - that officials have begun toning down Germany's "No financial aid for Greece" mantra.

"One senior German official said Berlin and other eurozone governments were prepared to lend Athens money or buy its sovereign bonds, should the Greek administration run into trouble rolling over debt on the markets.

"Lorenzo Bini Smaghi, of the European Central Bank's executive board, told Italian television that it was 'possible that money will be needed' to help Greece. But it would be a sum 'much more limited' than the figure of about €20bn ($27bn) discussed by eurozone officials this month.

"Athens has about €20bn in debt coming due in April and May, which will need to be refinanced. Eurozone nations hope that current Greek reforms will convince investors to buy its bonds - with the eurozone only covering any shortfall.

"German officials have said any funding gap the zone might have to fill could well prove 'quite small'. Berlin might push for the symbolism of all euro nations chipping in modest amounts to meet this shortfall, according to these officials.

"A tried-and-tested allocation key under consideration for this approach is based on the gross domestic product and population-weighted shareholdings of the European Central Bank. By this measure, Berlin would cover 28 per cent of Greece's funding gap, Paris 21 per cent and Rome 18.

"The bigger the Greek funding need, however, the more this would strain other budgets also under pressure in Italy, Spain, Portugal and Ireland. For this reason, a French official said helping Athens could yet be voluntary.

"In a sign that any help would be decided in an ad hoc manner, a German official said measures would be agreed 'on a case-by-case basis'. It would be up to each country to decide for itself how to structure its contributions."

Source: Gerrit Wiesmann and Peggy Hollinger, Financial Times, February 23, 2010.

The Wall Street Journal: Greek debt crisis - Athens choked by general strike
"A massive general strike to protest EU-mandated austerity measures closed banks, government offices and post offices, crippling the Greek capital on Wednesday. The Wall Street Journal's Andy Jordan reports from the streets of Athens."

Source: The Wall Street Journal, February 24, 2010.

MartinKronicle: Greece and California death match
"The spreads between Greece/German bunds and California/30-yr Treasuries are widening. Investors are demanding more for carrying the risk. The downgrade in CA paper yesterday will give the Greek bonds a run for their Drachmas ...

"According to a Reuters report, the spread between 10-year Greek government bonds and the benchmark Euro zone German bunds has risen to an 11-month high of 298 bps, up from 265 the day before. The high is 300 bps set about a year ago. The equivalent for Spanish bonds is trading at 81 bps premium over German bunds.

"According to an article in Bloomberg, the spreads between CA debt and the 30-year bond are also widening and PIMCO was quoted as saying that the CA debt crisis is headed back to disaster levels.

"Bloomberg: 'A taxable California bond that matures in 2039 traded today for an average yield of 7.79 percent in blocks of more than $1 million, the highest since December 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California's bond and 30-year Treasuries, according to Bloomberg data.'

"Yikes ...!

"Add to that the fact that S&P downgraded California's debt rating to AA- from AA ... not that I hold S&P in any esteem - I don't. But the fact is that CA will now have to pay higher coupon payments on the issuance of new debt thanks to the downgrade. They deserved it."

Source: MartinKronicle, February 24, 2010.

Financial Times: Goldman role in Greek crisis probed
"The US central bank is looking into Goldman Sachs's role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.

"'We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,' Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman.

"Testifying before Congress, Mr Bernanke also responded to concerns that instability in markets for Greek debt and other securities has been heightened by trading in other derivatives, known as credit default swaps, which compensate investors in case of default.

"Mr Bernanke said default swaps are 'properly used as hedging instruments' and that 'using these instruments in a way that intentionally destabilises a company or a country is counterproductive'.

"The Securities and Exchange Commission is 'examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices', said a spokesman.

"Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and 'fully betting against them' - and about Goldman's role in particular. Goldman declined to comment."

Source: Alan Rappeport, Tom Braithwaite and David Oakley, Financial Times, February 25, 2010.

Financial Times: Bernanke signals US rates to be kept low
"US interest rates will remain at exceptionally low levels for an 'extended period' in spite of the 'nascent' economic recovery, Ben Bernanke, chairman of the Federal Reserve, told Congress on Wednesday.

"Mr Bernanke painted a gloomy picture of the economy, still struggling with high unemployment and a weak housing market. Inflationary pressures, the main driver of tighter monetary policy, were likely to remain 'subdued', he said.

"Facing lawmakers for the first time in his second term as Fed chairman, he told the House financial services committee: 'The Federal Open Market committee continues to anticipate that economic conditions - including low rates of resource utilisation, subdued inflation trends and stable inflation expectations - are likely to warrant exceptionally low levels of the federal funds rate for an extended period.'

"The insistence that rate rises are months away will damp fears that last week's increase in the discount rate - at which commercial banks can borrow emergency cash from the central bank - from 0.5 per cent to 0.75 per cent heralds a swifter tightening of monetary policy.

"Fed officials, including Mr Bernanke, have indicated it was simply a move to unwind emergency liquidity measures put in place during the crisis, as a result of improving conditions in the financial markets, and not a tightening move. Goldman Sachs economists said it was 'crystal clear' the Fed did not anticipate raising rates soon.

"Nevertheless, the Fed this month began to lay out its vision for the sequence of measures that it expects to take to withdraw reserves from the financial system once the economic recovery is sufficiently strong. Although the economy grew at an annualised rate of 5.7 per cent in the fourth quarter of 2009, economists are expecting the pace of growth to slow over the course of the year. The Fed is expecting growth of 3 per cent to 3.5 per cent this year.

"'A sustained recovery will depend on continued growth in private sector final demand for goods and services,' said Mr Bernanke.

"Mr Bernanke also addressed the fallout from the financial crisis. He said the US central bank would step up surveillance of financial institutions and agreed that congressional investigators should be allowed to audit the emergency facilities put in place during the crisis."

Source: James Politi, Financial Times, February 24, 2010.

MoneyNews: Pimco - Fed move isn't start of tightening cycle
"The Federal Reserve's surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, the manager of Pimco, the world's biggest bond fund, told Reuters.

"'I don't think it's the beginning, really, of a tightening from the standpoint of monetary policy,' Bill Gross told Reuters soon after the Fed's decision.

"'I don't think it is the beginning of an increase in the fed funds rate or in terms of interest on reserves that has been discussed as well.'

"The US central bank took pains to draw the distinction between the discount rate and its target for the overnight interbank rate, its main monetary policy tool. That rate remains unchanged near zero percent as a fragile US economic recovery struggles to gain traction.

"'Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities,' the Fed said in a statement.

"'The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,' it said.

"'I don't think the Fed dares increase the fed funds or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,' said Gross.

Source: MoneyNews, February 19, 2010.

Financial Times: Fed efforts boosted by Treasury's $200 billion debt plan
"The Federal Reserve's ability to drain excess liquidity from the financial system received a boost on Tuesday when the Treasury revived a plan to sell $200bn in short-term debt and store the proceeds at the central bank.

"The move comes as the Fed lays the groundwork to shrink its balance sheet in preparation for the time when the economy is sufficiently strong to require a tightening of monetary policy.

"By bolstering its Supplementary Financing Programme, the Treasury would help the Fed remove $200bn in reserves from the financial system. Some economists said that this would help bring the Fed's main interest rate closer to the upper end of its current 0-0.25 per cent target.

"'This move does mean there will be $200bn fewer reserves in the banking system, which could provide a little bit of lift to the effective fed funds rate,' said Michael Feroli of JPMorgan. 'As such, it could be seen as a first step in putting the Fed in position to raise rates.'

"However, the move was described as a 'purely technical adjustment in liquidity' by Joseph Abate of Barclays Capital. He said: 'The $200bn worth of reserves drained ... is unlikely to have a noticeable effect on the effective funds rate, which remains locked under 15 basis points.'

"The Fed did not comment on the move, but Ben Bernanke, chairman, could address the issue when he faces Congress on Wednesday. The Treasury programme was introduced during the crisis to help the Fed better manage its balance sheet.

"It had been wound down since last September, when the government's borrowing capacity ran up against the US debt ceiling. Congress recently agreed to raise the debt ceiling to $1,900bn, making it possible to revive the programme."

Source: James Politi, Financial Times, February 24, 2010.

TheStreet.com: Stiglitz says beware of double dip
"Joseph Stiglitz, Nobel prize winning economist and the author of Freefall, says the worst effects of the credit crisis may be behind us, but the American economy remains highly vulnerable to a double dip recession."

Source: TheStreet.com, February 24, 2010.

Asha Bangalore (Northern Trust): Minor revisions of Q4 real GDP
"Real gross domestic product grew at an annual rate 5.9% in the fourth quarter of 2009, slightly higher than the previously reported increase of 5.7%. Upward revisions of inventories, exports, structures, and equipment and software more than offset downward revisions of consumer spending, government spending, and residential investment expenditures to yield a higher headline reading compared with the advance estimate.

"At the cost of reiterating, the fourth quarter headline GDP number is large but not strong because real final sales increased only 1.9% in the fourth quarter, while inventories accounted for nearly seventy percent of the increase in real GDP during the fourth quarter.

"Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with virtuous cycle of real and financial recovery working together to lift economic growth."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Total continuing claims remain at elevated level
"Initial jobless claims rose 22,000 to 496,000 in the week ended February 20. Essentially, initial jobless claims established a bottom in January and have once again resumed an upward trend, which is very worrisome. Continuing claims, which lag initial claims by one week, were virtually steady at 4.617 million and the insured unemployment rate was unchanged at 3.5%.

"Total continuing claims, inclusive of claims under special programs, fell slightly to 10.29 million during the week ended February 6 from 10.56 million in the prior week. Total continuing claims have risen 3.95 million over the past year. The labor market remains the biggest concern of the FOMC, competing closely with the housing market."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Clusterstock: The unemployment chart you'll love and hate
"Here's an unemployment chart you'll both love and hate, from Citi's Steven Wieting.

"As shown below, since 1980, employment (in red) has fallen after corporate profits (in black) have risen, and vice versa. The relationship is very clear.

"Problem is, there's about a one-year lag between the two trends. This highlights what should simply make sense - companies hire people once they see profits rebounding, and more importantly once they believe that adding more people will lead to higher profits. Still, this fact of economics isn't fun for the unemployed.

"But here's the good news. Given the recent rebound in corporate profits the US has already experienced, there is a very high chance that employment will get better over the coming twelve months. One can't stress enough the fact that employment is a lagging indicator."

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - Business Insider), February 25, 2010.

Continue to Part II