Archives for September 2016

Current Events Cause Rates to Remain – Weekly Update for September 26, 2016

2016-09-26-blog-pic

Stocks rallied again last week after the Federal Reserve voted not to raise interest rates this month. While few expected the Fed to act last week, official statements suggest the path to higher rates looks clearer. For the week, the the S&P 500 gained 1.19%, the Dow grew 0.76%, the NASDAQ added 1.17%, and the MSCI EAFE stayed stable.

Let’s dig more deeply into the Fed’s recent statements. The Fed cited continued strength in the labor market, economic growth, and better wage growth in its case for higher interest rates. However, tepid inflation (largely due to lower energy prices) and a desire to get the timing right caused most of the Federal Open Market Committee (FOMC) to vote to hold rates steady.

Three members of the FOMC dissented from the majority vote, believing that the Fed should have raised interest rates this month. One dissident, Boston Fed President Eric Rosengren, believes that the labor market could overheat in 2017, potentially derailing the economic recovery if action isn’t taken.

An overheating labor market could send wages to unsustainably high levels while productivity (output per worker per hour) falls. While higher wages might sound pretty good to American workers, unsustainable labor market trends could lead to the sharp recessionary contraction economists want to avoid. However, the health of the labor market doesn’t boil down to a single measure of unemployment, and the rest of the committee seems to believe that raising interest rates too soon is riskier than potentially raising them too late.

The market appears to agree, and investors see the Fed reinforcing the idea that the economy still has room to grow. At least one Wall Street analyst believes we’re in the “sixth or seventh inning of a nine inning game.” Despite the Fed’s increasingly hawkish tone about raising interest rates, Wall Street isn’t fully convinced the central bank will pull the trigger in December. Though the FOMC will meet again in November, the Fed is unlikely to make a move until after the election. The latest estimate of trading interest shows that traders view the odds of higher rates in December at 54.2%.

fed

The Fed has worked hard to convince the public that it intends to raise rates soon. Why? One of the tools the central bank can use to affect markets is that of its “bully pulpit,” the leverage of its powerful position. In the past, the Fed has used the bully pulpit to sound the warning about irrational market highs and give Americans plenty of notice about future policy moves. The Fed hopes that telegraphing plays will give markets time to digest the news and avoid a shock.

This week, Monday’s presidential debate and a key meeting of Organization of the Petroleum Exporting Countries (OPEC) members could lead to more market volatility. Oil prices have been a major driver of market movements this year and movement toward freezing production (thereby reducing the supply glut that is contributing to low prices) would cause volatility. How likely is a coordinated production freeze? Not very likely since it would require historic cooperation between geopolitical opponents such as Saudi Arabia and Iran. We’ll keep you informed.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Manufacturing Survey

Tuesday: S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Durable Goods Orders, EIA Petroleum Status Report

Thursday: GDP, International Trade in Goods, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

fed


HEADLINES:

Housing starts fall more than expected. Groundbreaking on new houses fell 5.8% in August as building activity declined broadly after increasing this summer. However, a rebound in permits for new houses suggests housing demand may strengthen.

Existing home sales fall for second straight month. Home resales fell in August, dinged by a shortage of housing inventory on the market. Growth in home prices is outpacing wage growth, weighing on sales activity.

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell by 8,000 to a two-month low last week. Continued labor market growth could give the Fed the green light to raise interest rates in December.

Manufacturing gauge drops to three-month low. A measure of manufacturing activity slipped in September as weakness in new orders and a strong dollar weighed on demand. New orders rose at the slowest rate this year and hiring was slow.

A Volatile Market Waiting for Answers – Weekly Update for September 19, 2016

blog-post-2016-09-19

Volatility picked up last week due to pressures from lower oil prices and speculation about the timing of the Federal Reserve’s next rate hike. This summer has been historically calm for markets, leading markets to trade without big intraday gains or losses. However, Friday broke that streak, possibly ushering in a period of greater volatility as uncertainty looms. For the week, the S&P 500 gained 0.53%, the Dow grew 0.21%, the NASDAQ added 2.31%, but the MSCI EAFE dropped 2.49%.

With mixed information and an uncertain political landscape, the market is facing a dilemma. On the one hand, economic data is neither weak nor strong enough to make policymakers’ choice easy on whether they should raise interest rates. On the other hand, the unpredictable nature of the presidential race contributes to market volatility. We’ve discussed throughout the race that it is not the result of the election that cause volatility, but rather the uncertainty leading up to the ultimate vote. All in all, Fed economists have repeatedly stated their intentions to raise rates soon, though no one is certain about the timing of this hike.

The Federal Reserve’s Open Market Committee will meet this week to decide whether or not to raise interest rates for the first time since December 2015. The Fed has a dual mandate: to maximize employment and keep inflation stable. Headline unemployment is below the Fed’s target of 5.0%, but inflation has remained stubbornly below the Fed’s long-run goal of 2.0%.

Fresh inflation data suggests a warmer trend. Two measures of inflation, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) deflator, rose in recent months, indicating that the economy is getting closer to the Fed’s target. While the increase in inflation might give pro-hike Fed economists ammunition at this week’s meeting, many analysts still don’t think the Fed will immediately raise rates.

Markets have been pushing new highs recently, and it wouldn’t surprise us to see a return to a volatile pattern in the days and weeks ahead. Uncertainty around economic growth, the November elections, Federal Reserve activity, and a future British exit from the EU could cause investors to become more cautious in the weeks ahead. We’ll be closely monitoring the overall market climate and will be in touch if we feel any prudent changes to investment strategies are necessary.

As always, we want to be sure to focus on long-term investing especially when there are brief ups and downs in the market. Please reach out to us by leaving a comment, emailing (hello@hzcapital.com) or giving us a call at 419-425-2400 if you have any questions about your portfolio. We’d love to connect with you and chat about how current events impact the market as a whole. Thanks for reading!

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, Fed Chair Press Conference

Thursday: Jobless Claims, Existing Home Sales

Friday: PMI Manufacturing Index Flash

capture

HEADLINES:

Consumer sentiment steady in September. A measure of how Americans feel about the economy and their financial prospects remained unchanged between August and September, suggesting households remain upbeat heading into fall.

Retail sales fall unexpectedly. U.S. retail sales fell more than expected in August on weak sales of autos.

Industrial production falls in August. Production in U.S. factories fell 0.4% last month amid a drop in demand for appliances, electronics, and machinery. Cooling demand for big-ticket items could spell trouble this quarter.

Weekly jobless claims rise less than expected. The number of Americans filing new claims for unemployment benefits rose last week, but increased less than economists expected.

Special September 2016 Market Update Video

In this video:

  • Tony gives an update on market related news over the last month
  • Discusses investing and politics
  • Discusses the power consumer spending and small businesses have on the overall economy.

Also, stay tuned to the end for a special profile interview with Dr. Greg Arnette, the owner of the local coffee shop We Serve. Coffee, located in downtown Findlay, Ohio.

Thanks for watching!

Interest Rate Debate: The Fed’s Decision is Nearing – Weekly Update for September 12, 2016

blog-post-2016-09-12Monetary policy was at the forefront of investors’ minds last week as we all continue to calculate the odds of an interest rate increase at this month’s Federal Reserve’s Open Market Committee (FOMC) meeting. After trading flat for most of the week, stocks sank Friday on fears of the future rate hike. For the week, the S&P 500 lost 2.39%, the Dow fell 2.20%, the NASDAQ dropped 2.36%, and the MSCI EAFE lost 0.16%.

The European Central Bank (ECB) declined to increase its stimulus program, voting to stand pat on interest rates and current bond-buying activity. The decision wasn’t a total surprise as the Eurozone economy has proved resilient after Britain voted to exit the EU. However, the ECB did confirm that it will consider further quantitative easing in 2017 if conditions worsen. No exit date for Britain has been announced, though the new prime minister has indicated it will not begin before next year.

On our side of the Atlantic, surprise comments by a voting member of the Fed increased speculation that a rate hike may come this month. When markets are quiet, even rumors can be enough to spark a selloff. In previous weeks, Fed officials have ramped up hawkish rhetoric, suggesting sentiment that the Fed is moving toward a rate hike. Even reliably dovish officials, who have historically maintained a cautious stance, are showing interest in raising rates again.

We have now entered the quiet period before the FOMC meets September 20th, meaning we won’t get more statements from Fed officials before they vote on monetary policy. The information blackout will give investors plenty of spare time to digest previous statements and come to grips with the idea that the Fed is serious about raising rates this year.

All the speculation around the Fed’s increasing assertiveness about rates had a palpable effect on markets, which may be what the Fed wants to achieve. The chart below shows Wall Street trading probabilities of higher interest rates in coming months.

capture

On Thursday, traders put the odds of a September hike at just 18.0%. By the close of trading on Friday, the odds had surged to 24.0%. The odds of a December hike had been about even; now, traders seem to believe the Fed will raise rates again this year.

Is last week’s pullback a minor blip? We can’t know for certain, but investors should prepare for a bumpy ride this fall.

The week ahead is packed with economic data, including critical reports on business inventories. Positive data could contrarily cause further selling if investors believe it could spur the Fed to act. Negative data might likewise be greeted with cheers. As we move to a Fed vote and uncertainty around the November election peaks, markets are likely to remain volatile and perhaps even move into a more prolonged selloff. Ultimately, we want to focus on investing for the long term, and encourage you to tune out the media “noise” as volatility occurs. We’ll be sure to keep you updated on the latest.

ECONOMIC CALENDAR:

Tuesday: Treasury Budget

Wednesday: Import and Export Prices, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD, Retail Sales, Philadelphia Fed Business Outlook Survey, Empire State Manufacturing Survey, Industrial Production, Business Inventories

Friday: Consumer Price Index, Consumer Sentiment, Treasury International Capital

capture

HEADLINES:

Fed Beige Book shows wage gains restricted to skilled workers. A key report released by the Federal Reserve showed that the economy grew modestly in July and August. However, data shows that most wage gains occurred only in skilled jobs where employers are struggling to find qualified workers.

Weekly jobless claims drop. The number of Americans filing new claims for unemployment benefits fell unexpectedly last week, marking the 79th straight week that claims remained below the key 300,000 level associated with a healthy labor market.

Monthly job openings increased in July. The number of available jobs, a data point closely watched by Federal Reserve economists, increased by 3.9% In addition, the hiring rate rose by 3.6%, pointing to a strong labor market.

Gas prices slide after summer. The summer driving season is over and falling gas prices might slip further this winter. Americans enjoyed the cheapest summer gas since 2004, and economists hope the “gas dividend” will boost spending this quarter.

Interest Rate Uncertainty after August Jobs Report – Weekly Update for September 6, 2016

blog-09-06-16After losing steam the previous week, stocks rose last week as investors cheered a weak jobs report and the declining probability of a September interest rate increase by the Federal Reserve. For the week, the S&P 500 gained 0.50%, the Dow grew 0.52%, the NASDAQ added 0.59%, and the MSCI EAFE grew 0.44%.

The August job report showed that the economy gained 151,000 new jobs instead of the 180,000 jobs predicted by economists. Since investors are keenly watching the odds of a rate hike ahead of the mid-September Federal Open Market Committee meeting, they treated the jobs miss as a win since it might reduce the chance of a rate hike this month.

However, investors might be cheering too early since there’s still the possibility the Fed might act. The August employment report is notoriously unreliable due to the effects of seasonal labor, which often peaks in the summer. Since 2011, August job gains have undershot estimates by about 49,000 and have been revised upward by an average of 71,000 jobs over the following months.

If enough Fed economists see the August numbers as a seasonal aberration, they may use June/July numbers to determine that the economy is strong enough to weather another rate hike. However, despite Fed Chair Janet Yellen’s hawkish tone, some experts don’t believe the Fed will act until December at the earliest.

There is also the November election to consider; historically, the Fed tends to choose the more cautious path when facing a close call. One expert pegs the odds of a September hike at 55% and a December hike at 80%. Overall, Wall Street traders are less confident of a September hike, assigning just a one-in-four chance of a rate increase.

Digging deeper into the August numbers, we see that the headline unemployment rate remained at 4.9%, and a broader measure of unemployment, which also includes discouraged and underemployed workers, also remained unchanged at 9.7%. Wage growth also slowed; hourly wages rose just three cents, increasing just 2.4% over the previous 12 months.

Though overall wage gains are slow, different sectors show different stories. Employees in high-demand tech jobs saw their wages go up 4.3% over a year go. Even restaurant and hotel employees are experiencing year-over-year wage gains of 3.9%.

Our View

All told, the August jobs report paints a mixed picture of the economy. New jobs are still being created at a respectable clip and represent a strong tailwind in the third quarter. However, the pace of jobs growth may be waning, which is a concern. Furthermore, the pace of wage growth is also slow and may represent a divide between the workers who are fully experiencing the benefits of an economy close to full employment, and those who are being left behind.

As attention focuses on the Fed’s September meeting, we expect to see further volatility. However, the fact that the Fed is seriously contemplating a rate hike this fall suggests policymakers believe in the underlying strength of the economy. That’s great news.

ECONOMIC CALENDAR:

Monday: U.S. markets closed for Labor Day Holiday

Tuesday: ISM Non-Manufacturing Index

Wednesday: JOLTS, Beige Book

Thursday: Jobless Claims, EIA Petroleum Status Report

Capture

HEADLINES:

Consumer confidence surges. A measure of how confident Americans feel about the economy rose to its highest level in nearly a year, suggesting that consumer spending may support growth this quarter.

Auto sales remain brisk. Sales of U.S. cars and trucks were still healthy in August, but lagging activity at Ford and GM made analysts worry that total volume is declining from its blistering 2015 pace.

Factory orders up in July. Orders to U.S. manufacturers rose to the highest level in nine months in July. However, much of the increase was due to volatile orders for aircraft, indicating the surge may be temporary.

Mortgage applications up 2.8%. Overall mortgage applications were up last week as interest rates remained stable. However, refinancing activity should be higher given rates near record lows.