First Do No Harm
Financial Review by Sinclair Noe for 09-17-2015
DOW – 65 = 16,674
SPX – 5 = 1990
NAS + 4 = 4893
10 YR YLD – .08 = 2.22%
OIL – .25 = 46.90
GOLD + 11.80 = 1132.00
SILV + .21 = 15.24
The Fed will raise rates someday, just not today. The FOMC issued their statement today, and they left interest rates unchanged, again. The biggest change in the wording dealt with international markets, saying: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
The statement also included this new line: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad.” You may recall that China was also frequently referenced in the Beige Book published a couple of weeks ago in preparation for this FOMC meeting.
The Fed also released their economic projections and they seem to be forecasting more of the same: GDP just over 2% for 2015, the unemployment rate finishing the year at 5%, inflation still significantly short of their target, and the outlook for a rate hike before the end of the year. But don’t bet on it; this Fed might never get off the Schneid. There will be growing pressure for a rate hike, if only to avoid the perception that the Fed is weak, or the idea of a Yellen put, or the view that market volatility is enough to stay the Fed’s decision again.
And the Fed’s decision to wait raises concerns about global economic weakness. Slowing growth in China has rippled across the world, hitting commodity-producing countries hard. The MSCI Emerging Markets Index, which captures stock markets in nations such as Brazil, Chile, Egypt and China, is down 14 percent this year. Just how bad is the situation in the emerging markets? And is it about to get worse?
The statement from the Fed also featured the first dissenter, Richmond Fed President Jeffrey Lacker was gung ho for a 25 basis point increase. And in the economic projections, known as the “dot plot”, which include forecasts of where each policymaker thinks the Fed should have its policy rate at the end of a given period, there’s one remarkable outlier in the projections. For the first time ever, one monetary policymaker thinks the U.S. needs to move to negative interest rates until at least the end of 2016 to achieve full employment and get inflation back to 2 percent. That was probably the parting shot of outgoing Minneapolis Federal Reserve Bank President Narayana Kocherlakota. Beyond that one vote for negative rates, most of the dots point to higher rates by the end of the year. And there is a good chance that might happen, if only to prove they can.
The decision to leave rates unchanged doesn’t mean much; remember we’re talking about one-quarter of one percent. The Fed hasn’t chosen to resolve the doubts about whether its monetary tools can raise rates without causing upheaval in the banking system. But it has also chosen not to create new uncertainty over whether a rate hike is a one-off or a signal of more to come. Even so, forecasts show policymakers predicted that the Fed’s benchmark rate would rise gradually, reaching 2.6 percent by the end of 2017. In June, they predicted that the rate would reach 2.9 percent by then.
Futures traders are pricing in a 21 percent probability the central bank increases it target range in October, a 49 percent chance by the December meeting and a 56 percent likelihood by January. Treasuries rallied, pushing yields lower; while the dollar tumbled to a three-week low; stocks wobbled then slipped – there is bound to be some concern that slowing global growth could hamper the domestic economy.
There was some speculation that if the Fed didn’t raise rates today, they would at least come out with a hawkish statement, reaffirming their intent to raise rates soon – but that didn’t happen. And so this is being interpreted as a very dovish statement from the Fed. It might also be giving us some insight into the Yellen-led Fed. Greenspan or Bernanke probably would have hiked rates, right or wrong. And I thought Yellen would be a bit more hawkish, just to be assertive. That was not the case. Yellen appears more cautious, but that doesn’t mean she made a mistake.
There is more danger in hiking rates prematurely than in waiting. The Fed may think inflation is transitory but for now, it certainly isn’t a problem – no harm in waiting. The Labor market has been improving but there is still plenty of slack; a stronger labor market might attract some discouraged workers to try again; a stronger labor market might result in push on stagnant wages – no harm in waiting. If the Fed raises rates, no borrower will feel the pain more acutely than the federal government, the nation’s largest borrower; and fiscal policy has been irresponsible at best; the Fed couldn’t feel confident raising rates with the prospect of a federal government shutdown in less than 2 weeks – no harm in waiting. The housing market has finally shown signs of life, but many markets, like Phoenix, still haven’t fully recovered; a Fed rate hike would almost certainly result in higher mortgage rates – no harm in waiting. A Fed increase might have prompted investors to pull money out of emerging, damaging their economies, and hurting their abilities to buy goods from developed countries – no harm in waiting.
The problem for the Fed is that any action they take will take time to work; steering the economy one way or the other is like trying to steer a huge ship, not a small sports car; there is lag time before the effects of policy are felt. And there might never be a perfect time to change policy. If they don’t get to it by the December, next year we move into an election year, which means there will be political implications thrown into the mix.
There was other economic news today. The number of Americans getting laid off from their jobs remains near the lowest level in decades. New applications for U.S. unemployment benefits fell by 11,000 to 264,000 in the seven days ended Sept. 12. This is the lowest level of claims since mid-July, when claims fell to 255,000, the lowest level since September 1974.
Construction of new homes slowed down over the past two months. Housing starts fell 3% to an annual rate of 1.13 million units in August. Starts in July were revised down sharply to a decline of 4.1% to an annual rate of 1.16 million units from the prior estimate of a 0.2% gain to 1.21 million.
The U.S. current account deficit narrowed to a preliminary $109 billion in the second quarter, or 2.5% of gross domestic product, from a revised $118 billion.
The Philadelphia Fed manufacturing index took a surprise turn into negative territory in September, falling to negative 6 from positive 8.3 in August.
Copper prices rose to two-month highs in early Asian trading on worries about supply disruptions due to a powerful earthquake off the coast of Chile – the world’s largest copper producer. The magnitude 8.3 quake shook buildings in the capital Santiago and generated tsunami warnings from New Zealand to California. Five people are now known to have died, and one million residents have been evacuated from Chilean coastal areas.
French media giant Altice has confirmed it will buy Cablevision for an enterprise value of $17.7B, or $34.90/share in cash (a 22% premium to Wednesday’s closing price). Together both operators represent the fourth-largest cable operation in the U.S. market.
General Motors has agreed to pay $900 million and sign a deferred-prosecution agreement to end a U.S. government investigation into its handling of an ignition-switch defect linked to 124 deaths. The deal means GM will be charged criminally with hiding the defect from regulators and defrauding consumers, however, the charges will be put on hold while the automaker fulfills the terms of its settlement. Individuals are also not expected to be charged in the criminal suit.
Australia’s antitrust regulator has deferred a decision again on Royal Dutch Shell’s proposed $70 billion takeover of BG Group, this time until Nov. 12, warning the deal could raise prices and cut the supply of natural gas to consumers on the east coast of Australia. The takeover has already been cleared by the European Commission, U.S. and Brazilian antitrust authorities, but still needs approvals from Australia’s Foreign Investment Review Board and China to go ahead.
Saying the deal was unlikely to hurt competition, the Justice Department has granted antitrust clearance to Expedia’s $1.3 billion takeover of rival Orbitz Worldwide. The department had investigated how the merger might affect the commissions Expedia and Orbitz negotiate with airlines, car rental companies and hotels and explored new charges to consumers.
Northrop Grumman announced a new $4 billion share repurchase program. The defense contractor had previously approved a $3 billion program last December.
Sony said China censorship rules are hurting sales of its PlayStation 4 video game console, even though a ban on foreign-made gaming consoles was lifted last year.
KKR‘s Samson Resources filed for Chapter 11 bankruptcy protection, as the oil and gas producer hands control over to its lenders. Samson was bought four years ago by a group led by KKR for $7.2 billion.
Back from the dead? Google seems to have resurrected its troubled Glass connected eyewear project, now called Project Aura, by hiring engineers and software developers from Amazon. Aura will remain within Google rather than Alphabet to collaborate more closely with advanced technology efforts and develop other wearables. Google stopped selling the initial $1,500 version of Glass to consumers in January following waning interest, criticism over its price and privacy concerns.