Confirmation of further impending monetary stimulus followed the conclusion of the Federal Reserve’s policy setting meeting on September 13th, providing a temporary boost to both the fixed income and equity markets. Commodities – especially oil, which had responded positively to similar prior rounds of stimulus, are weakening on concerns regarding economic slowdowns in Europe and China. For more info: www.nafcu.org/nifcus

1. Third Quarter 2012
Market Commentary
Confirmation of further impending monetary stimulus followed the conclusion of the Federal Reserve’s policy
setting meeting on September 13th, providing a temporary boost to both the fixed income and equity
markets. Commodities – especially oil, which had responded positively to similar prior rounds of stimulus,
are weakening on concerns regarding economic slowdowns in Europe and China.
The Federal Reserve’s Chairman Bernanke used his post meeting statement to emphasize the Board’s
commitment to promoting stronger economic growth, stating that they would keep interest rates low through
mid 2015 and would not tighten monetary policy until the unemployment rate falls below 7%. This change in
tone is significant, as it implies that the Fed will tolerate a slightly higher rate of inflation so as to promote job
growth.
As in 2010 and 2011, economic growth slowed around mid-year. The hope is that the economy follows the
same pattern, rebounding in the last quarter of 2012. Retail sales have picked up modestly, as consumers
continue to reduce mortgage debt. Based on several recent reports, the domestic housing market is
rebounding. Refinancing activity is picking up – a development that bodes well for consumer sentiment and
cash flow. The perception of rising home prices reinforced by ultra low interest rates may be providing the
impetus for undecided buyers to jump in. But, in the export focused manufacturing sector, economic
difficulties in target markets are now causing a slowing in activity.
The upcoming November U.S. Presidential election, and the January 2013 implementation of sequester
mandated spending cuts are commanding a large share of the American public’s attention. Recently there
has been some posturing about allowing the economy to go over this “fiscal cliff”; thereby allowing the Bush
tax cuts to sunset and setting the stage to extract revenue concessions. There has also been talk about the
political parties negotiating a compromise that effectively amounts to once again deferring the difficult
choices. Both these options would be viewed extremely negatively by the three major rating agencies, all of
which have already weighed in with strong words as to the likely impact on the country’s credit rating should
a credible plan not be forthcoming. So far, Standard and Poor’s Corporation has been the only agency to
act, downgrading the U.S. long term credit rating from AAA to AA+ in August 2011.
Although there have been no further credit ratings actions taken this past quarter, a general sense of unease
about the Euro-zone persists in the markets. Spain continues to teeter on the brink of asking for assistance,
but the Spanish populace is now demonstrating their increasing displeasure with proposed austerity
measures.
The Federal Reserve’s Operation Twist extends through year-end and continues to drive up inventories of
short-term U.S. Treasury debt held on dealer balance sheets. Yields have remained slightly higher during
the past quarter for short-term U.S. Treasury securities and overnight repurchase agreement transactions.
This was fortunate, given the continuing shortage of high quality bank issuance, as it allowed us to manage
the liquidity positions in NIFCU$ without sacrificing yield.
Hillary Elder
Team Leader
NIFCU$  350 California Street, 6th Floor  San Francisco, CA 94104
Toll-Free (800) 634-6521 www.nifcus.com