Janet Yellen

September Jobs Report Needs an Asterisk

September Jobs Report Needs an Asterisk

Hurricanes Irma and Harvey blew across the labor market, as employers shed 33,000 jobs in September. Yes, it was the first negative reading on payrolls in seven years, but until we have the subsequent few months’ reports, it’s hard to read too much into the results. (As a note, Puerto Rico is NOT included in the BLS report.) The Labor Department said that the storms likely contributed to “a sharp employment decline in food services and drinking places (-105K) and below-trend growth in some other industries.” 

What Could Go Wrong for Investors?

What Could Go Wrong for Investors?

If you’ve been thinking that stock markets have been pretty quiet this year, you are right. Through the first seven months of the year, none of three major stock market indexes has fallen by more than 5 percent. And one gauge of market movement, the CBOE Volatility Index (VIX), which measures investors’ expectation of the ups and downs of the S&P 500 Index over the next month, recently dropped to its lowest level in 24 years. Low readings have tended to be equated with low anxiety and high stock prices. Amid this environment, you might be wondering what could go wrong? There are a number of risks to the US and global markets that persist. Their existence does not mean that long-term investors should change their game plans, but they are a reminder to guard against complacency and to always approach investing with caution.

3 Economic Risks

3 Economic Risks

During her Congressional testimony, Fed Chair Janet Yellen painted a fairly bright picture of the US economy, stressing a rebound in consumer spending, which should allow the central bank to gradually raise short-term interest rates over the next few years. Investors were heartened to hear that message and drove stocks higher, with the Dow closing at a new all-time high after Yellen’s first day of testimony. What could undo this rosy picture? There are a number of risks to the US and global markets that persist, though three rise to the top of the list. Their existence does not mean that long-term investors should change their game plans, but they are a reminder to guard against complacency and to always approach investing with caution.

Will Weak Jobs Put Rate Hikes at Risk?

Will Weak Jobs Put Rate Hikes at Risk?

With the labor market slowing down, will the Federal Reserve raise interest rates at its next policy meeting in two weeks? That was the big question after the Labor Department reported that the economy added a disappointing 138,000 jobs in May, worse than the 185,000 analysts had expected. Additionally, the previous two months were revised lower by 66,000, putting the three month average at just 121,000. In the first five months of 2017, the economy has seen average monthly job creation of 162,000, down from 189,000 in 2016, and 226,000 in 2015. 

Strong Feb Jobs Means Fed Rate Hike

Strong Feb Jobs Means Fed Rate Hike

Get ready for a Fed interest rate hike this week. The February jobs report showed that the US economy added a larger than expected 235,000 jobs, the unemployment rate edged down to 4.7 percent and annual wage growth bounced back from a revised 2.6 percent in January to 2.8 percent, ahead of the 2.7 percent average seen in the second half of last year. The increase in wages demonstrates that the labor market is tightening and that state-level minimum wage hikes are filtering through the economy.

Trump’s Next Shake Up: The Fed

Trump’s Next Shake Up: The Fed

Get ready for the Trump administration’s next shakeup…the Federal Reserve. As Fed Chair Janet Yellen heads into her semi-annual testimony before Congress this week, she knows the score--this is probably the penultimate appearance at what is likely to be a historically short term for a Fed Chair. Yellen’s term as Chair expires in February 2018 and during the campaign, candidate Trump said that he would “most likely” replace her, because “She is not a Republican."

Federal Reserve Rate Hike #2

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The Federal Reserve will likely raise short-term interest rates this week, when it convenes the last policy meeting of 2016. The second rate hike of the cycle comes one full year after the first, nine years after the last time it had previously raised rates. The central bank is probably more confident about this action than it was a year ago, because it will occur after the President-elect indicated that there would likely be a new boost to the economy, in the form infrastructure spending, tax cuts and deregulation. While GDP averaged a fairly subdued 2 to 2.25 percent during the recovery thus far, the potential Trump actions have prompted economists to increase their estimates for 2017 to 2.5 to 3 percent. Economists and investors will be paying close attention to any mention of how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted. A faster growing economy could mean that the Federal Reserve will finally see its much-desired pick up prices and as a result, the central bank should be gearing up for a series of rate hikes in 2017.

Here’s the rub: for all of candidate Trump’s complaining about Janet Yellen’s Fed keeping rates too low for too long, the biggest risk to the current expansion would be if the Fed were to move more quickly than anticipated, putting the current stock market rally at risk and potentially sparking a recession.

Fear not…current Fed officials appear to on track to under-deliver on their inflation target, as they have done consistently over the past twenty years. That’s why Yellen has been so willing to be patient on raising rates. Although Trump took aim at Yellen for not raising rates faster, she may in fact be the ideal Fed Chair to keep the economic expansion/stock market rally alive in 2017.

HOW WILL THE FED’S ACTIONS IMPACT CONSUMERS?

Savings: Any increase in the Fed Funds rate could help nudge up rates on savings accounts, but after the first increase, banks passed very little of the increase on to their customers. Bottom line: savers’ suffering is not likely to end any time soon.

Mortgages: While rates for fixed rate mortgages key off the 10-year government bond, not short term rates that the Fed controls, yields have already started to rise since the election. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.27 percent, the highest level since October 2014 and up from 3.5 percent before the election. Adjustable rate mortgages (ARMs) are linked to shorter-term rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate now. Those who have ARMs could see payment increases down the road.

Auto Loans: For those planning on purchasing a new car with a loan, don’t worry too much. An extra quarter-point increase on a $25,000 loan amounts to a few dollars a month in higher payments.

Credit Cards: Most credit cards have variable rates and unlike the savers, the card companies are quick to pass along the increase to the borrowers within a few billing cycles. You may want to consider locking in a zero balance transfer offer, because it won’t be around as the Fed keeps increasing rates in 2017.

Student Loans: Federal loans are fixed, so there will be no impact from a rate increase, but some private loans are variable. Double check your paperwork to determine what benchmark rate (Libor, prime, T-bill) your loan is tied to.

HOW WILL THE FED’S ACTIONS IMPACT INVESTORS?

Stocks: If the Fed goes slowly and the economy improves, the stock market should be fine. But, as noted above, if the central bank ends up raising rates faster than expected, it could hurt prices. In the past, shares of banks, energy, industrials and technology do well amid rising rates.

Bonds: When interest rates rise, bond prices fall and in this particular cycle, it could be even more painful, because the slow growth recovery lulled many bond investors into complacency. That said, there is no reason to abandon the asset class. For most investors who own individual bonds, they will hold on until the bonds mature and then purchase new issues at cheaper prices/higher rates. For those who own bond mutual funds, they will reinvest dividends at lower prices and as the bonds in the portfolio mature, the managers will reinvest in new, cheaper issues with higher interest rates. In other words, being a long term investor should help you weather rising interest rates, though you may want to consider lowering your duration, using corporate bonds and keeping extra cash on hand. (For more on bonds, check out this post.)

MARKETS: There were new records all around, providing more post-election gains. Since November 8th, the Dow is up 8 percent, the S&P 500 has gained 11 percent and the NASDAQ is up 9 percent.

  • DJIA: 19,756, up 3.1% on week, up 13.4% YTD (23rd record close of 2016)
  • S&P 500: 2259, up 3% on week, up 10.6% YTD
  • NASDAQ: 5444, up 3.6% on week, up 8.7% YTD
  • Russell 2000: 1388, up 5.6% on week, up 22.2% YTD
  • 10-Year Treasury yield: 2.47% (from 2.39% week ago)
  • January Crude: $51.48
  • February Gold: $1,161.40, 5th straight weekly decline
  • AAA Nat'l avg. for gallon of reg. gas: $2.20 (from $2.17 wk ago, $2.01 a year ago)

THE WEEK AHEAD:

Mon 12/12:

Tues 12/13:

6:00 Small Business Optimism

Weds 12/14:

8:30 Retail Sales

8:30 PPI

9:15 Industrial Production

2:00 FOMC Meeting Announcement/Economic Forecasts

2:30 PM: Fed Chair Janet Yellen press conference

Thurs 12/15

8:30 CPI

8:30 Empire State manufacturing survey

8:30 Philly Fed manufacturing survey

10:00 NAHB homebuilder survey

Friday 12/6

8:30 Housing Starts

Will the Post-Election Stock Rally Last?

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Stock indexes staged a broad, post-election rally, as investors pushed aside their concerns about a potential global trade war and a clampdown on immigration, and instead bet that President-elect Trump’s promise of infrastructure spending would propel profits at large industrial companies and his tax cuts would boost the economy. (Irony alert #1: Congressional Republicans have argued that the financial crisis stimulus (the $787B American Recovery and Reinvestment Act) did not work and fought against subsequent infrastructure spending plans as a way to boost economic growth.) While most believe that infrastructure spending would help the economy, the total impact would be largely determined by its size. At one point during the campaign, candidate Trump promised to spend about $550 billion over five years. If there is general agreement on the positive aspects of infrastructure spending, there is little consensus on Trump’s potential tax plan, which in its current form would disproportionately favor wealthier Americans.

According to the Tax Policy Center, by 2025, 51 percent of Trump’s tax reductions would go to the top one percent of earners (those earning more than about $700,000). Yes, the plan would raise the after tax income of middle class Americans by about 1.8 percent, but the top 0.1 percent would see a tax cut of more than 14 percent of after tax income. (Irony alert #2: The Trump tax plan would likely exacerbate income inequality that already exists and could be a surprise to those Trump voters who said that they felt left out of US economic progress.)

Economists caution that there are two other problems with the Trump tax plan: (1) rich people do not tend to spend their tax cuts; rather they redirect the savings into their investment accounts—that’s good for financial markets, but not so hot for the overall economy and (2) the tax cuts would cause a spike in federal debt levels – the plan would increase the federal debt by $5.3 trillion over ten years, according to the nonpartisan Committee for a Responsible Federal Budget. (Irony alert #3: Taken together, the spending and the tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?)

Trump’s spending and tax cuts could help stimulate the economy in the short term, though the combination of those policies could also spur inflation and prompt the Federal Reserve to raise interest rates at a faster pace than currently expected. Under normal monetary policy, a faster rate hike cycle might snuff out a recovery. But some economists are more concerned that under President Trump, there would be a change in the composition of the Federal Reserve Board. (There will be a couple of vacancies next year and Fed Chair Janet Yellen’s term ends in February 2018.) A less disciplined Fed might accept more inflation, leading to higher long-term interest rates and a weak US dollar. A glimpse of how these policies could impact the bond was seen last week: more than $1 trillion was wiped off the value of bonds around the world.

Another area that could see big changes under President Trump is regulation. In addition to easing up on environmental rules, most expect to see a watering down of the Dodd Frank Wall Street reform, which had attempted to reign in the excesses, which contributed to the financial crisis. (Irony Alert #4: A populist President, put in office by an electorate that hates banks, would make life easier for the financial services industry. Financial sector stocks increased by 11 percent last week.)

Under Trump, the Consumer Financial Protection Bureau (CFPB), which was created out of the Dodd-Frank Act, will likely get diluted. In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.

And finally, the big investment firms, which fought tooth and nail NOT to put clients’ interests first, are ready to resurrect their battle to water down the consumer-friendly Department of Labor Fiduciary Rule set to go into effect in April 2017.

MARKETS:

  • DJIA: 18,847, up 5.4% on week, up 8.2% YTD (best week of 2016, biggest weekly gain since Dec 2011)
  • S&P 500: 2164, up 3.8% on week, up 5.9% YTD
  • NASDAQ: 5237, up 2.8% on week, up 4.6% YTD
  • Russell 2000: 1282, up 10.2% on week, up 12.9% YTD
  • 10-Year Treasury yield: 2.12% (from 1.77% week ago)
  • British Pound/USD: 1.2593 (from 1.2518 week ago)
  • December Crude: $43.41, down 1.5% on week, 3rd consecutive weekly loss
  • December Gold: $1,224.30, down 6.2% on week, lowest close since early June and worst weekly loss since June 2013
  • AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.20 a year ago)

THE WEEK AHEAD:

Mon 11/14:

Tues 11/15:

Home Depot

8:30 Retail Sales

8:30 Empire State Manufacturing

8:30 Import/Export Prices

Weds 11/16:

Cisco, Lowe’s, Target

8:30 PPI

9:15 Industrial Production

10:00 Housing Market Index

Thursday 11/17:

Wal-Mart, Staples

8:30 CPI

8:30 Housing Starts

8:30 Philly Fed Business Outlook

10:00 E-Commerce Retail Sales

Friday 11/18

10:00 Leading Indicators

Yellen's Jackson Hole Speech May Move Markets

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The first eight months of the year have been dominated by one question: When will the Fed raise rates next? The answer may come from a surprising place: Jackson Hole, WY. Since 1982, the Federal Reserve Bank of Kansas City has hosted a late summer economic policy symposium in Jackson Hole. The event brings together central bankers, private market participants, academics, policymakers and others to discuss the issues and challenges in a public but informal setting. While this may sound like a bunch of boring people in a beautiful location, in recent years, some central bankers have made big news from Jackson. In 2010, Fed Chair Ben Bernanke discussed the pros and cons of several policy options, including buying “longer-term securities,” which was the premise of the second round of quantitative easing or QE2. Two years later, Bernanke used his Jackson Hole remarks to introduce the possibility of a third round of asset purchases known as QE3, when he said: “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Four years later, the central bank is no longer buying assets to prompt economic growth, but so far, it has only increased its benchmark interest rate one time-last December. While some Fed officials have recently been leaning towards an interest rate increase sooner rather than later, others are concerned that the economy remains too fragile to risk higher rates. Further evidence of the division between the two camps was evident in minutes from the last policy meeting.

That’s why at this year’s Jackson Hole confab, traders and economists will listen closely to current Fed Chair Janet Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit” to see if there is either an implicit or explicit clue about when the next rate hike will occur. While she is not likely to say, “September is baked in the cake,” she may discuss the factors that would lead to an increase in September, like another strong employment report along with firming inflation. Right now, the market is predicting just a 20 percent chance of a September move and 50 percent likelihood at the December meeting. A September surprise could knock stocks down from their peaks and usher in what could be a bumpy autumn.

MARKETS: Summertime and the living is easy….in what was a typical August week, stocks bounced around all-time highs, but closed mostly unchanged amid light volume.

  • DJIA: 18,552, down 0.1% on week, up 6.5% YTD
  • S&P 500: 2183, down 0.01% on week, up 6.8% YTD
  • NASDAQ: 5238, up 0.1% on week, up 4.6% YTD
  • Russell 2000: 1236, up 0.5% on week, up 8.9% YTD
  • 10-Year Treasury yield: 1.58%
  • British Pound/USD: $1.3078
  • September Crude: $48.52, up more than 20% since falling below $40 in early Aug
  • August Gold:  at $1,340.40
  • AAA Nat'l avg. for gallon of reg. gas: $2.16 (from $2.13 wk ago, $2.63 a year ago)

THE WEEK AHEAD:

Mon 8/22:

8:30 Chicago Fed National Activity Index

Tues 8/23:

10:00 New Home Sales

10:00 Richmond Fed Manufacturing Index

Weds 8/24:

9:00 AM FHFA House Price Index

9:45 PMI Manufacturing Index Flash

10:00 Existing Home Sales

Thursday 8/25:

First day of Kansas City Fed Econ Symposium in Jackson Hole, WY

8:30 Durable Goods Orders

11:00 Kansas City Fed Manufacturing Index

Friday 8/26:

8:30 GDP

8:30 International Trade in Goods

8:30 Corporate Profits

10:00 Janet Yellen’s speech from Jackson Hole

10:00 Consumer Sentiment

Will Fed Wait Until Dec to Raise Rates?

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Seven years ago, the recession officially ended. According to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, the organization responsible for declaring the beginning and end of U.S. expansions and contractions, June 2009 was the nadir of the worst recession since the Great Depression. Yes, employment bottomed out six months after the official end date, but that NBER says that is to be expected, because a recession “is a period of diminishing activity rather than diminished activity.” In other words, although the economy was still weak after June 2009, with lingering high unemployment, it had expanded considerably from its trough 15 months earlier. Where does that leave us today? The U.S. has seen a sluggish recovery, but the economy is far better off than it was seven years ago, by almost every objective metric. That said, a seven year expansion seems ripe for a breather, which is why so many are worried about the next recession. Adding to the concern was a report last week from the World Bank, which downgraded global growth estimates. “Overall growth remains below potential” and “looking ahead, the prospects of global growth remain muted.”

As expected, the commodity exporters have been hit particularly hard, but even advanced economies are stymied by sluggish growth. U.S. GDP is likely to be about 2 to 2.2 percent this year, consistent with the pace experienced over the past few years and the last few jobs reports have shown deceleration.

Amid this environment, it’s hard to see how the Federal Reserve could possibly raise interest rates when it meets this week. Although many central bankers went on a speaking junket in May, telling us that the U.S. economy had shown enough progress that a rate hike would be appropriate in the “coming months,” but the recent jobs data, combined with the dour World Bank assessment, makes it nearly impossible for the Fed to budge this week.

Instead, it’s back to parsing the Fed’s accompanying statement, the updated FOMC projections and Chair Janet Yellen’s press conference, for any signals of when the next rate hike might come. The answer, according to Capital Economics, “depends on whether the weakness in payroll employment in not just May but April too was a temporary blip or the start of a more serious downturn.”

If hiring picks up and the U.K. votes to remain within the European Union on June 23rd, the next Fed meeting at the end of July could be a possibility, but it would be a long shot. The more likely possibility would be the September meeting. If not September, it’s hard to fathom Fed action in November, just days before the presidential election. Unless there is a big uptick in economic activity, the last policy of the year on December 13 and 14, the one-year anniversary of the first rate hike of this cycle, may be the first and only Fed rate increase of 2016.

MARKETS: As U.S. indexes flirted with all-time record levels, the real action was in the bond market. The yield of the 10-year U.S. treasury tumbled to 1.639%, the lowest close since May 2013. Additionally, yields of comparable bonds in Germany and Japan, fell to all time lows, as investors bet on the continuation of sagging growth and low inflation and found solace in the overall safety of the bond market.

  • DJIA: 17,865 up 0.3% on week, up 2.5% YTD
  • S&P 500: 2096 down 0.2% on week, up 2.6% YTD
  • NASDAQ: 4894 down 1% on week, down 2.3% YTD
  • Russell 2000: 1164, flat on week, up 2.5% YTD
  • 10-Year Treasury yield: 1.639% (from 1.7% a week ago)
  • July Crude: $49.07, up 0.9% on week
  • August Gold: $ 1,275.90, up 2.7% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.38 (from $2.35 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/13:

Tues 6/14:

FOMC Meeting Begins

6:00 NFIB Small Business Optimism

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 6/15:

8:30 PPI

8:30 Empire State Mfg Survey

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 6/16:

8:30 CPI

8:30 Philly Fed Business Outlook

10:00 Housing Market Index

Friday 6/17:

8:30 Housing Starts