..Fed hikes rates, hints at 3 more. Zuckerberg responds to Facebook breach. No real solutions. DC pols still working on budget bill. Home sales rise, inventories tight.
Financial Review by Sinclair Noe for 03-21-201
DOW – 44 = 24,682
SPX – 5 = 2711
NAS – 19 = 7345
RUT + 8 = 1579
10 Y + .03 = 2.91%
OIL + .41 = 65.58
GOLD + 21 = 1332.80
The Federal Open Market Committee of the Federal Reserve increased its benchmark interest rate target range by 0.25% to a new band of 1.5%-1.75%. This move puts the effective fed funds rate at around 1.63%, the highest since September 2008. All eight voting members of the FOMC voted in favor of Wednesday’s decision.
The Fed acknowledged an upgraded outlook for the economy by including an entirely new sentence in its statement which said, “The economic outlook has strengthened in recent months.” The statement noted, however, that, “Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.” In January, the Fed has described gains in the labor market, household spending, and business investment as “solid.” The Fed also changed its characterization of job gains from its January policy statement to “strong” from “solid.”
In February, the unemployment rate stood at a 17-year low of 4.1% for the fifth-straight month. In the first quarter, GDP growth hit an annualized rate of 2.5% while manufacturing, small business, and consumer sentiment surveys all continue to hold near post-crisis highs. The announcement also included the Fed’s latest Summary of Economic Projections (SEP), which includes its dot plot forecast of future interest rate increases. The dot plot shows that Fed officials are split on whether two or three additional interest rate increases will be needed in 2018. Of the 15 officials offering forecasts on interest rate increases over the balance of 2018, seven expect three or more additional rate hikes while eight are calling for two or fewer. The dot plot also indicates that officials expects two interest rate increases will be warranted in 2019 and 2020, bringing the effective fed funds rate to 3.375% by the end of 2020. This rate is above the long-run equilibrium rate of 3% implied by the dots. The guidance, in terms of the future rate hikes was a touch more hawkish, but that should have been expected – the Fed can talk tough and then wait to see if the economy really is exceeding expectations.
The latest SEP also shows the Fed upped its outlook for GDP growth in 2018 to 2.7%, an increase from 2.5% in its December forecasts. This is also a marked increase from the 2.1% GDP growth forecast for 2018 held by officials in September 2017. Fed officials also increased their expectations for GDP growth in 2019 on Wednesday to 2.4% from 2.1% in December. The unemployment rate is expected to fall to 3.6% by the end of the decade according to the Fed’s latest forecasts, while inflation should hit 2.1% in 2020, above the Fed’s 2% target.
Today’s 25 basis point hike in rates to 1.75% will have little impact on how much interest is paid to the trillions of dollars held in checking and savings accounts across the US (simply because banks continue to drown in over $2 trillion in excess reserves and thus do not really need all those deposits). The initial reaction from the FOMC statement was to sell the dollar and bonds but once the press conference started, bonds were bid and the dollar sank further. The Dow Jones industrial average, which had been up about 130 points prior to the Fed announcement, initially jumped to a 250 point gain after the news. It then settled back to just a 13-point gain for by mid-afternoon. The 10-year Treasury bond yield, a benchmark for long-term rates, edged up marginally to 2.91%.
Mark Zuckerberg says Facebook plans to conduct an investigation of apps on its platform, restrict developer access to data, and give its members a tool that shows the apps connected to their Facebook data and can easily disable that access. The responses come days after news surfaced of Cambridge Analytica improperly using data from 50 million users that it acquired through a college researcher’s app. After two straight days of losses, Facebook stock finished the regular session up slightly and continued that trajectory after the bell. In the Facebook post, Zuckerberg also wrote that the method Cambridge used to acquire the data cannot work today and offered a timeline of events. The timeline shows Facebook learned Cambridge Analytica misappropriated data as far back as 2015 – even if they did not know at the time how the data would be misused. Conspicuously absent from the timeline is any public notification that 50 million people had their data stolen three years ago. Zuckerberg writes: “This was a breach of trust between Kogan, Cambridge Analytica and Facebook. But it was also a breach of trust between Facebook and the people who share their data with us and expect us to protect it. We need to fix that.” Conspicuously absent from the admission is an apology. Companies and industries typically are pushed into regulation only after hubris in the wake of failed self-control.
Facebook isn’t really a social network. It’s barely even an advertising company. It’s a data analytics firm, which manages to use its position as the middleman for a vast proportion of all human communication to find out everything there is to know about its users. And then it sells that data, your data, without regard for your privacy and with little regard for how the data is used or misused, at least until there is an egregious misuse – as in the case of Cambridge Analytica.
The biggest companies in the world base their businesses around users hitting “I agree” on a dialogue box on a website once, a decade ago, and then never being told what their agreement entails, nor being offered any way to retract their consent and take back control of the information they gave up. Those agreements we click on can run over 100,000 words of legalese; they were never intended to be read or understood. At some point, we will need to address the issue of transparency in the digital world. Zuckerberg did not address that today. At some point, we will need to address the issue of privacy and build rules around the clear principle that the only person who can ever own an individual’s data is that individual. The Facebook-Cambridge Analytica scandal reminds us that we have a long way to go, and the journey is fraught with peril.
Republicans and Democrats struck a preliminary agreement today on some major points of contention in a bill to fund the government. The deadline for passing the spending bill that would keep the government running through September is midnight Friday. It was unclear as of this afternoon when leaders would release the text of final legislation.
The National Association of Realtors reports existing home sales jumped 3.0 percent to a seasonally adjusted annual rate of 5.54 million units last month, ending two straight monthly declines. There is an acute shortage of homes, especially at the lower end of the market. According to the NAR, sales of houses priced below $100,000 plunged 17 percent from a year ago. Sales of properties in the $100,000-$250,000 price range slipped 1.0 percent on a year-on-year basis. The Realtors group said there was double-digit sales growth for houses costing $250,000 and above. The resulting high prices from the inventory squeeze, combined with rising mortgage rates, are a constraint for first-time buyers, who have been largely priced out of the market.
German conglomerate Bayer won EU antitrust approval for its $62 billion buy of Monsanto. The tie-up is set to create a company with control of more than a quarter of the world’s seed and pesticides market. Dow and Dupont, and ChemChina and Syngenta had earlier led a wave of consolidation in the sector. The U.S. Justice Department, which is also reviewing the merger, said in a statement on its website that it would press on with its review and that the market in the two regions was quite different.
Media company Meredith Corp, which completed the acquisition of Time Inc in January, said on it has cut around 200 jobs and plans to lay off 1,000 more over the next 10 months.
America’s teens may have to find somewhere else to get their ears pierced. Claire’s, the chainstore known for its tween jewelry and ear piercing, declared bankruptcy. The company operates 7,500 stores across the world and, according to court filings, “has pierced over 100,000,000 ears worldwide”. Like Toys R Us, Claire’s was taken over by venture capital companies and saddled with huge debts. Those debts cost it $183 million a year in interest payments alone.