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US stock market daily report (January 30, 2013, Wednesday)

January 31, 2013, Thursday, 06:32 GMT | 02:32 EST | 12:02 IST | 14:32 SGT
Contributed by Millennium Traders

Because of the massive U.S. national debt, defense spending will remain under pressure for months, if not years to come. While companies marketing aerospace and military wares have done fairly well over the past two years, the first major cuts could be coming within the next two months with government spending on defense on course to decelerate over the next decade. The three-year-old Standard & Poor’s Aerospace and Defense Select index has shed 2% of its value since hitting an all-time peak last week which indicates, investors are reviewing their defense holdings. Unless both parties act to change the terms of the so-called sequester before March 1, there are up to $50 billion in defense cuts slated to take place in 2013. To insure that Washington cuts some spending, even pro-military Republicans are willing to entertain a tighter defense budget.

ADP estimated Wednesday that the U.S. added 192,000 private-sector jobs in January.

U.S. Commerce Department reported Wednesday that growth in the U.S. economy turned negative in Q4, contracting by 0.1% annual rate in the final three months of 2012 - for the first time since the last recession, dragged down by a reversal in military spending, lower inventories and falling exports. Consumer spending, which is considered the main engine of the U.S. economy, rose 2.2% in Q4 compared to 1.6% rate in Q3 and 1.5% rate in Q2 - suggesting that the economy remains on a solid growth path. Investment in residential housing climbed 15.3% during Q4. After falling 2.6% in Q3, business spending on equipment and software hosted a gain of 12.4% in Q4. Total private-sector investment experienced its first decline in seven quarters - down 0.6% - due to lower spending on office buildings, other structures and warehouses. Mostly due to a 22.2% decline in volatile defense outlays, government spending fell 6.6% after a 3.9% rise in Q3. Inflation as measured by the core PCE price index, which strips out food and energy, rose at an annual 0.9% rate, for the lowest reading in three years however, full year core PCE advanced 1.7%. Full year 2012, the U.S. grew at a 2.2% pace, compared to 1.8% in 2011 and 2.4% in 2010.

Text from Federal Open Market Committee meeting Wednesday:
Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.