…..Dow hits another record. Fed raises interest rates 25 basis points. Plans to shrink balance sheet. CPI shows inflation stalled. Oil prices fall. Retail sales drop. Business inventories slip.
Financial Review by Sinclair Noe for 06-14-2017
DOW + 46 = 21,374
SPX – 2 = 2437
NAS – 25 = 6194
RUT – 8 = 1417
10 Y – .07 = 2.14%
OIL – 1.78 = 44.68
GOLD – 6.00 = 1261.10
Another record high close for the Dow Industrials. Stocks moved lower today after the Federal Reserve announced it was raising interest rates. The move was completely expected, so maybe the markets were reacting to weak retail sales data instead. Stocks recovered from session lows, with the Dow turning positive in the final hour of trade.
The Federal Reserve raised its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent. This was the second rate hike in the past 3 months. The hike was widely expected. In its statement following a two-day meeting, the Fed’s policy-setting committee indicated the economy had been expanding moderately, the labor market continued to strengthen and a recent softening in inflation was seen as transitory. This was in-line with expectations for one more rate hike from the Fed for 2017, possibly in September or December. The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. The Fed’s decision to raise rates was approved 8-1, with Neel Kashkari, head of the Fed’s Minneapolis regional bank, dissenting in favor of holding rates unchanged. Kashkari sees a very different economy from his colleagues, in terms of both inflation and the labor market.While Yellen and the members who voted for hikes did so, in part, because they were worried about rising inflation, Kashkari doesn’t share their concern. If Kashkari is right, it means the Fed may be leaving lots of jobs and growth on the table.
The Fed also gave a first clear outline on its plan to reduce its $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2008 financial crisis and recession. The Fed will allow its bond holdings to mature and fall off the balance sheet without being replaced or rolled over. The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings. For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month. Back of napkin math means the Fed will try to shrink the balance sheet in half over about 4 years, once the process starts. No date given. Fed Chair Janet Yellen said the process could begin “relatively soon.”
It won’t take long until you start to feel the rate hike. Look for interest rates on credit cards to jump relatively soon, probably 60 days, or two billing cycles. The average household now pays a total of $1,292 in credit card interest per year, according to NerdWallet’s research. Now that the Federal Reserve increased its rates as analysts expected, the total will rise to $1,309. On the flip side, savers can look forward to earning higher rates on deposits, but don’t expect much, bank deposits are paying just over 1%, more or less, which is not enough to keep pace with inflation.
The Fed also issued updated economic forecasts. The Fed’s revised forecasts reduced its estimate for unemployment by year’s end to 4.3 percent from a March projection of 4.5 percent. Unemployment has already reached a 16-year low of 4.3 percent. The Fed kept forecast for economic growth this year of 2.2 percent, up slightly from its March forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. In a news conference, Fed Chair Janet Yellen said she still expects inflation to hit a 2% target next year, mentioning that recent declines are coming from such areas as telecom. Earlier in the session we had some disappointing readings on inflation and retail sales.
Higher interest rates are normally good for a currency, but the dollar’s performance suggest traders see little chance for any more increases this year – at least as long as the turmoil in Washington distracts the Trump administration from implementing its pro-growth fiscal agenda. Meanwhile, Treasuries rallied, pushing the yield on the 10-year note down 7 basis points and further flattening the yield curve, an indication that debt traders are cutting their expectations for growth. Bond traders are clearly worried the Fed is on a path to harm the nation’s prospects for growth without meaningfully adding to its arsenal of tools to deal with any downturn.
Meanwhile in the oil market, the price of crude is doing its best to keep inflation under wraps. Oil fell below $45 a barrel to its lowest since November as government data showed that weaker demand at the start of the summer driving season led to another increase in gasoline stockpiles. Gasoline inventories rose 2.1 million barrels last week, according to the Energy Information Administration. Adding to the market pessimism, the International Energy Agency said new production from OPEC’s rivals will be more than enough to meet growth in demand next year, overwhelming the oil group’s efforts to reduce supplies by cutting its own output. The EIA forecasts output at major American shale fields will reach a record in July.
Consumer prices declined in May, reflecting a big drop in energy prices. The Consumer Price Index, or CPI, edged down 0.1 percent last month following a small 0.2 percent increase in April. Prices had fallen 0.3 percent in March. In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined. Core inflation, which excludes energy and food, rose a slight 0.1 percent in May. Over the past 12 months, consumer prices are up 1.9 percent while core inflation has risen 1.7 percent. In May, food costs edged up a tiny 0.2 percent while energy costs fell 2.7 percent, led by a 6.2 percent drop in the price of gasoline. Over the past 12 months, food costs are up just 0.9 percent while energy prices have risen 5.4 percent. Clothing costs dropped 0.8 percent in May while the cost of new cars and used cars both fell 0.2 percent. Medical services such as the cost of doctor’s visits dipped 0.1 percent in May but have risen 2.5 percent over the past 12 months.
Those low food costs might not last. Wheat has quietly staged a huge rally, as a prolonged dry spell has left the U.S. spring crop in its worst shape in almost three decades. Forty-five percent of the crop, the high-protein variety grown in northern states, was in good or excellent condition as of June 11. That’s down 10 percentage points from the prior week and marks the worst rating for the time of year since 1988. Futures have surged more than 15 percent in the past month. Spring wheat futures for July delivery reached $6.45 3/4 a bushel, the highest for a most-active contract since December 2014.
The Commerce Department said retail sales dropped 0.3 percent, the first decline since February and the sharpest since a 1 percent decrease in January 2016. Last month, sales fell 2.8 percent at electronics stores, the biggest such drop since March 2016. They fell 2.4 percent at gasoline stations and 1 percent at department stores, which have struggled with competition from online retailers.
Business inventories fell by a seasonally adjusted 0.2 percent in April, following a gain of 0.2 percent in March. It was the first decline since a 0.2 percent drop in October. Sales were flat after contracting 0.1 percent in March. When businesses increase stockpiles, it is generally seen as a sign of their confidence that sales will increase in the coming months. A decrease in inventories can be a sign of pessimism about future sales.