…..FOMC raises rates; very expected; not hawkish. CPI inches higher. Retail sales slow. Business inventories rise. Twitter hacked. Dutch Trump loses. MIT rewards rules breakers.
Financial Review by Sinclair Noe for 03-15-2017
DOW + 112 = 20,950
SPX + 19 = 2385
NAS + 43 = 5900
RUT + 20 = 1382
10 Y – .08 = 2.51%
OIL + 1.24 = 48.96
GOLD + 21.10 = 1220.70
Today is Fed Day. Policymakers at the Federal Open Market Committee of the Federal Reserve raised interest rates, as expected. The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent marked one of the Fed’s most convincing steps yet in the effort to return monetary policy to a more normal footing. This was the second interest rate hike in the past 3 months, and only the third rate hike in the past decade. The Fed indicated it is still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December. The Federal Reserve under Janet Yellen has been very good at communicating any changes in policy; they do nothing that could shock the markets.
The Fed issued a statement confirming their view that the “labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective…”
The Fed added a fresh wrinkle by noting that inflation was little changed and still running below its long-term target if energy and food prices were excluded. In a press conference following the statement, Yellen said the Fed isn’t trying to get inflation to run faster than 2% for a while to catch up from being below 2% for so long, but that doesn’t mean the Fed would stomp on the brakes as soon as the 2% target was breached. “Two percent is not a ceiling on inflation. It is a target.”
Yellen also said the Fed was not really considering any economic implications from President Trump’s proposals for tax cuts, deregulation, and infrastructure spending. Yellen said, “We haven’t tried to map out what our response would be to certain policies. We have plenty of time to see what happens.” And Yellen added, “The simple message is, the economy is doing well.” It’s too early to react to Trump, Yellen said. Optimism is great, she said, but you have to show us actual changes in consumer or business spending, or actual changes in fiscal policies before we’re going to change our minds about the economy. The Fed has a wait-and-see attitude about whether consumer or business optimism will translate into actual increased spending. Yellen said, “It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions, based on expectations about the future.”
Yellen said the Fed does look at stock market valuations as part of its assessment of financial conditions, but there is no sign that the Fed is particularly worried about a dangerous bubble developing.
The lack of hawkishness from the Fed apparently caught some traders out of the money. Dollar-buyers exited the trade. Stocks shot higher as Yellen spoke. Financials were the weakest sector in the S&P. A rate hike tends to be a positive for banks, because it increases how much they can charge borrowers, compared with their own short-term borrowing costs. So, the banks wanted to hear that the Fed was going to be more aggressive in raising rates.
In theory, rising interest rates are supposed to hurt the stock market because it makes interest-rate instruments relatively more attractive and reduces liquidity in the marketplace. But in reality, interest rates and the stock market usually trend in the same direction over the long term. That is because the conditions that lead to higher rates, such as an acceleration in economic growth, also fuel bull markets for stocks, while the drivers of rate cuts, like an impending economic recession, are often behind bear markets. Eventually, rates could get high enough to choke off economic expansion and hurt stocks, but based on current market dynamics, the market appears to be safe for quite a while, maybe even years. So, the Fed has a long way to go before damaging the market or economy.
Of course, higher rates will hit people who have debt; everything from mortgage rates to car loans to credit card debt. That increase will cost consumers an additional $1.6 billion in credit card fees alone during 2017 For savers, a rise in Federal Reserve interest rates is good news. Savings account rates will likely increase slightly, which should help consumers, especially since interest rates on savings accounts are at historic lows. Although consumers shouldn’t expect those rates to rise much. Banks will likely have to collect extra income from borrowers before being able to pass those funds onto the savers.
The International Energy Agency says global oil inventories rose for the first time in January as the market grappled with increased production last year, but if OPEC maintains its output cuts, demand should overtake supply in the first half of this year. OPEC also flagged rising inventory levels, but raised its estimates for production outside the group and did not see a rebalancing between supply and demand until the second half of this year. The IEA said crude stocks in the world’s richest nations rose in January for the first time since July by 48 million barrels to 3 billion barrels, more than 300 million barrels above the five-year average.
Investors cashed out of US-based high-yield junk bond funds. Lipper data shows high-yield bond funds posted $2.1 billion in net withdrawals during the week ended March 8, the most since November 2016. Crude oil prices fell this week to 3-1/2 month lows. Energy producers are heavily represented in junk bond indexes. Higher interest rates could shrink bond prices and hike borrowing costs for indebted companies. Still US-based stock funds attracted their sixth straight week of net inflows, $8.5 billion, while taxable bond funds netted $2.8 billion despite the high-yield outflows
American consumers paid slightly more in February for goods and services such as groceries and rent, reflecting upward pressure on inflation that’s intensified since last summer. The consumer price index, or cost of living, rose by a seasonally adjusted 0.1% last month. The increase in inflation over the past 12 months advanced to 2.7% in February from 2.5% in January, putting it at the highest level since early 2012. Excluding the volatile food and energy categories, so-called core consumer prices rose 0.2% in February. Core prices have advanced 2.2% in the past year. Inflation-adjusted wages rose just 0.1% per hour in February and worker wages are unchanged in the past year.
Retail sales recorded their smallest increase in six months in February. The Commerce Department said retail sales ticked up a seasonally adjusted 0.1% in February, after a much bigger gain of 0.6% the previous month. January’s gain was revised higher. The figures suggest that strong job gains this year, near record-high stock prices and decent pay gains haven’t yet lifted spending. But last month’s sluggish pace could prove temporary, because spending was likely held back by delays in tax refund payments.
Business inventories in the U.S. rose 0.3% in January, largely because of more new vehicles sitting in auto dealer lots. Inventories at auto dealers rose 2%, reflecting a downturn in sales at the start of the new year. Sales were pumped up in December by holiday-season discounts and a slowdown was expected in January. The value of auto inventories are 9.3% higher compared a year ago. Millions of Americans who held onto to aging cars in the wake of the Great Recession have upgraded to newer vehicles, but much of that pent-up demand has been met.
Twitter shares were lower in early trading after a large number of high-profile Twitter accounts were hijacked. The hacker posted tweets that supported Turkish President Erdogan in his diplomatic spat with the Netherlands and Germany.
Dutch Prime Minister Mark Rutte’s party has taken the lead in an election widely seen as an indicator of populist sentiment in Europe. Anti-immigrant, anti-European Union figure Geert Wilders had run on a “de-Islamification” platform, calling for Islamic schools to be closed and the Quran and burqa to be banned. The latest polls show that no party will come close to winning an overall majority, so the post-election period will likely come down to forming a coalition government.
MIT has created an award for rule-breakers. The university’s Media Lab announced this week it will award $250,000 to a group or individual for disobedience. According to Joi Ito, the director of MIT’s Media Lab, “You don’t change the world by doing what you’re told.” The eligibility requirements are simple: “The recipient must have taken a personal risk in order to affect positive change for greater society.” The winner will be announced in July.