Thus Spake Yellen
Yellen speech is dovish. Risk on.
Financial Review by Sinclair Noe for 03-29-2016
DOW + 97 = 17,633
SPX + 17 = 2055
NAS + 79 = 4846
10 Y – .06 = 1.81%
OIL – .90 = 38.49
GOLD + 20.60 = 1242.90
The Federal Reserve raised interest rates in December and indicated they would like four more rate hikes in 2016. The March meeting of the FOMC took a much more dovish tone; policymakers left their benchmark lending rate target unchanged this month at 0.25 percent to 0.5 percent while revising down their median estimate for the number of rate increases that will be warranted this year to two hikes. Since that meeting a couple of weeks ago, various Fed officials have jawboned the markets about rate hikes, some calling for more rate hikes, others taking a more cautious stance. As a result, there was not much certainty about the Fed’s direction.
Federal Reserve Chair Janet Yellen spoke at an Economic Club of New York luncheon today. Yellen is definitely dovish. She said it is appropriate for US central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. The speech made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.
Yellen mentioned two risks in her speech. Growth in China is slowing and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth. A second risk is the outlook for commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy. The US economy seems to be slogging along and there are encouraging signs, including the continued strengthening of the labor market; the downside is a strong dollar hurting exports. The outlook for inflation is a bit uncertain. Since the March meeting, Fed officials have seen more evidence that the pace of domestic growth may be slowing. U.S. gross domestic product decelerated to 1.4 percent pace in the fourth quarter, while the Atlanta Fed’s GDPNow estimate for the first quarter is 0.6 percent, partly due to slower rates of consumer spending growth.
Yellen seemed to stress that even though rate hikes might not be imminent, the Fed still has policy ammunition. Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”
Well, of course the markets had a fairly predictable response – risk on. Market players have been conditioned to drink from the free-flowing trough of central bank easy money. Almost immediately government and corporate bond yields fell, the dollar weakened, gold jumped, the VIX declined, stocks popped, and the party was on.
But the celebration was slightly muted; Yellen said she still expected that headwinds from weak growth abroad, low oil prices and uncertainty over China would abate and allow the U.S. recovery to continue alongside a “gradual” series of rate hikes. The Federal Reserve’s accommodative policy has helped the economy recover but the engine still isn’t able to run at full throttle, no matter how much fuel the Fed puts in the tank. The missing ingredient is still a comprehensive fiscal policy response, and this being an election year, there is almost no hope of action; rather there is the distinct probability of inaction. So the Fed is left with nothing but monetary policy, which seems to be losing traction.
Consumer confidence jumped in March to 96.2. The present situation index, a measure of current conditions, slipped to 113.5 from 115.0. But the future expectations index rose to 84.7 from 79.9. On balance, consumers do not foresee the economy gaining any significant momentum in the near-term, nor do they see it worsening.
The S&P/Case-Shiller Home Price Index recorded a 5.4% annual increase in January 2016. The biggest jumps were in Portland, Seattle, and San Francisco, all of which rose by double digits. For Phoenix, prices dropped 0.2% for January, but for the past 12 months, existing home prices in Phoenix gained 6.1%.
The Bank of England is warning that risks around Britain’s referendum on the EU could push up borrowing costs, weaken the sterling and tighten rules for mortgage lending to landlords. The BoE’s Financial Policy Committee says, “The outlook for financial stability in the United Kingdom has deteriorated.” The central bank previously announced contingency plans in case of financial instability, though it has steered clear of recommending whether Britain should stay or leave the union.
Brazil’s biggest political party has left the governing coalition, delivering a major blow to President Dilma Rousseff just weeks before she faces an impeachment vote in Congress. The Brazilian Democratic Movement Party, known as the PMDB, approved the motion at a meeting of its national directorate that lasted less than 10 minutes. Party members can no longer hold positions in Rousseff’s government. The PMDB controls six ministries in her administration. Under Brazil’s presidential system, Rousseff will remain in office but the break sharply raises the odds she could be impeached in a matter of months.
Virtual reality company Oculus has started shipping pre-orders of its highly awaited Rift headsets, about two years after the company was acquired by Facebook. The black headgear, priced at $599, comes with a remote, an audio system, a sensor and an Xbox One wireless controller. Oculus said there were more than 30 games available in the Oculus Store and it would soon add “feature-length movies, new partners and lots more content.”
After successfully hacking the San Bernardino shooter’s iPhone without Apple’s help, the FBI is dropping its legal case to force Apple to unlock the device. Apple said in a statement, “This case should never have been brought.” The FBI did not reveal how they managed to break into the iPhone. And we still don’t know if the FBI will share its information with state and local police agencies. So the fight between Apple and the FBI is over – they both lost.
The Supreme Court handed organized labor a major victory, deadlocking 4 to 4 in a case that had threatened to cripple the ability of public unions to collect fees from workers who chose not to join and did not want to pay for the unions’ collective bargaining activities. The case was brought by 10 California public schoolteachers who objected to what are known as fair share dues being withheld from their paychecks. A ruling in their favor would have affected millions of government workers and weakened public-sector unions, which stood to lose fees both from workers who objected to the positions the unions take and from those who simply chose not to join while benefiting from the unions’ efforts on their behalf. The case was brought by the Center for Individual Rights, a libertarian group that pursued an unusual litigation strategy. Responding to signals from the Supreme Court’s more conservative justices, the group asked the lower courts to rule against its clients, a Christian education group and the teachers, so they could file an appeal in the Supreme Court as soon as possible. It wasn’t soon enough. Justice Antonin Scalia passed away, leaving just 8 justices and the lower court’s ruling stands.
The Federal Trade Commission filed suit Tuesday against Volkswagen for falsely advertising that hundreds of thousands of diesel vehicles were environmentally friendly, when they were secretly emitting excess pollution. The FTC filed suit in US District Court in San Francisco, saying that US consumers suffered “billions of dollars in injury” as a result of the deception. VW has admitted to using undeclared software that allowed 580,000 diesel vehicles built since 2009 and sold in the US to emit up to 40 times legally allowable pollution. The Justice Department sued VW for up to $46 billion in January for violating environmental laws and VW faces more than 500 civil lawsuits related to excess emissions, along with suits from some U.S. states.
Tesla is getting ready for its biggest-ever unveiling: the Model 3, the $35,000 sedan designed to take electric cars mainstream. It won’t be easy. Tesla’s direct-to-consumer sales are still prohibited by law in six states that represent about 18% of the U.S. new-car market.
SunEdison plunged 54% on reports that the SEC was investigating disclosures to investors about how much cash the solar company had on hand when its stock crash last year. SunEdison has fallen 95% over the past 12 months. Also, a holding company held by SunEdison is expected to seek bankruptcy protection. The company has already postponed the release of its 2015 annual report, twice. If SunEdison fails to file the report by Wednesday, it must reach accommodations with lenders on at least $1.4 billion in loans and credit facilities or face a potential technical default.
Warren Buffett’s stake in Wells Fargo hit 9.9% as of Dec. 31, most of which is held by Berkshire Hathaway. At 10%, Buffett would have to pass a review by the Federal Reserve in order to keep accumulating shares. While the central bank typically tries to limit the ties between non-financial companies and lenders, it has at times accepted a pledge by investors that they don’t plan to influence a bank; this happened in the ’90s when Buffett’s stake in AmEx rose above 10%.
Virgin America has received buyout offers from JetBlue and Alaska Air Group, according to Bloomberg. The airline is still discussing the offers with the bidders, and a deal could be announced next week at the earliest. It is also unclear if other suitors will emerge, and Virgin America may yet decide to abandon sale negotiations in favor of remaining independent.