The Price Paid for Disaster – Weekly Update for October 17, 2016

2016-10-17-blog-postThough stocks rose Friday after statements from Federal Reserve officials, the major indexes ended the week lower amid choppy trading. For the week, the S&P 500 lost 0.96%, the Dow fell 0.56%, the NASDAQ dropped 1.48% and the MSCI EAFE declined 1.40%.

Counting the Cost of Hurricanes

Our deepest sentiments go out to those impacted by the disastrous Hurricane Matthew. The toll these events take on humanity is incalculable; yet, we feel it is important to discuss the economic impact natural disasters have as well. Overall, experts have gotten pretty good at estimating the economic costs of lost production and physical damage due to major storms.

According to one economist, about two-thirds of the economic losses of a hurricane are related to property damage while one third come from economic losses. The insurance costs of property damage due to Matthew’s wind and storm surge are currently estimated to be between $4 billion and $6 billion, though those figures may rise as claims start rolling in. The chart below shows storm damage estimates for four major hurricanes since 1979. We can see that Hurricane Sandy and Hurricane Katrina dwarf Matthew in terms of overall damage.


However, Matthew is estimated to have a higher percentage of losses due to wind damage, which could have implications for insurance companies. Damage from storm-caused wind and surge is generally covered under standard homeowner’s and business policies, though they are often subject to high deductibles.

One estimate of Matthew’s overall cost, including evacuations, lost revenue, and other important factors, puts the total cost at over $10 billion. Though that figure is a drop in the bucket of the overall U.S. economy, the localized effect of closed businesses, damaged roads, and flooding in affected areas could be devastating. Flood damage is not usually covered, and many hurricane victims don’t have specialized flood insurance.

How much do disasters like Hurricane Matthew affect larger economic questions like Federal Reserve policy? We don’t know how the Fed considers natural disasters, but it’s likely that regional Feds like the Federal Reserve Bank of Atlanta include disaster-related figures in their reports.

Recent comments by Fed officials have left us with a cloudy picture about future interest rates. While it’s clear that many Fed officials believe economic conditions are strong enough to warrant a December rate hike, Fed Chair Janet Yellen isn’t so certain. In a Friday speech, she gave us some insight into the Fed’s reluctance to move on interest rates, saying that anomalies in economic trends leave her inclined to run a “high-pressure economy” to reverse more of the economic damage before it becomes permanent.



Monday: Empire State Manufacturing Survey, Industrial Production

Tuesday: Consumer Price Index, Housing Market Index, Treasury International Capital

Wednesday: Housing Starts, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales



September retail sales rise. Retail sales rebounded 0.6% last month, boosted by auto sales, which could be good news for the holiday shopping season.

Business inventories increase in August. Stocks of goods rose, especially among U.S. retailers, suggesting businesses might be expecting healthy demand for goods this quarter.

Consumer sentiment drops to one-year low. A measure of how optimistic Americans are about their financial prospects plummeted this month, suggesting Americans are concerned about the economy ahead of elections.

Small business confidence falls in September. A measure of confidence among American small-business owners dipped last month as declines in job openings and inventory investment declined.

October 2016 Market Update Video


In this video, Josh discusses the market performance for the last quarter, the volatility in the markets, and three key factors driving the volatility.

Special Quarterly Update – Weekly Update for October 10, 2016

adobe-spark-5After a volatile September, stocks ended the third quarter of 2016 resoundingly in the black. In the third quarter, the S&P 500 gained 3.31%, the Dow grew 2.11%, the NASDAQ added 9.69%, and the MSCI EAFE gained 5.80%.

What drove markets in Q3?

After pulling back in late June after Britain’s surprise vote to exit the European Union, markets recovered quickly in the early days of the third quarter. Though investors were able to enjoy a low-volatility summer, stocks returned to a choppy pattern in September.

Two key areas contributed to a lot of stock market volatility last quarter: monetary policy and the timing of the Federal Reserve’s next interest rate hike, and uncertainty around the November elections.

The presidential election is hotly contested and too close to call, giving investors plenty of concern about how the next administration will tackle the many issues facing America. House and Senate races also stand close, giving markets the grim prospect of several more years of filibusters and Washington antics.

Monetary policy also affected markets last quarter as investors speculated on the possibility of a September interest rate hike. Though the Fed chose not to raise rates at the last meeting, December is still in play.

Globally, the majority of the world’s central banks are moving toward lower interest rates (the chief exception being the U.S.). While the Fed is trying to raise rates this year and communicating its intentions clearly, the European Central Bank and Bank of Japan are in full-on quantitative easing mode in an effort to boost sagging economic growth.

This tug of war between major monetary players is the source of a lot of uncertainty in the world. Also stoking investor fears is the possibility that central banks have exhausted the limits of what they can do to boost economic growth.

What do we know about Q3 earnings season?

Third-quarter earnings reports are beginning to trickle in, and analysts are expecting another quarter of negative earnings growth. Estimates for Q3 profits and revenue declined as the quarter progressed, which is in line with the trend we’ve seen over the past few years. Overall, S&P 500 company earnings are expected to be down -2.9% over Q3 2015, though revenues are expected to be up +1.2%. These are very preliminary estimates, and we can expect plenty of surprises and individual success stories as earnings season progresses.

What might we expect next?

The weeks ahead will likely be dominated by the upcoming November elections. As election uncertainty resolves, attention will likely turn to the Fed’s December meeting and economic data. We’ll know more about future Fed moves after the official minutes from the September meeting are released this week. Consumer confidence has been volatile this year, but analysts hope that Americans will feel confident enough to open their wallets for the critical holiday shopping season and give economic growth a final boost.


Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Wednesday: FOMC Minutes

Thursday: Jobless Claims, Import and Export Prices, EIA Petroleum Status Report, Treasury Budget

Friday: PPI-FD, Retail Sales, Business Inventories, Consumer Sentiment



U.S. auto sales pause in September. Consumers tapped the brakes on motor vehicle purchases, causing the three major U.S. automakers to report declines in sales.

Construction spending falls again in August. Builders cut back on construction project spending for a second straight month, suggesting demand for residential and non-residential projects may be waning.

Factory activity picks up in September. U.S. manufacturing experienced a surge of unexpected growth last month after declining in August as new orders and production activity both grew.

September jobs report shows labor market strength. The economy added 156,000 new jobs last month, missing Wall Street expectations of 175,000. The labor force participation rate ticked upward as more Americans joined the labor force, and the unemployment rate nudged upward to 5.0%.

Quarter End Questions – Weekly Update for October 3, 2016

2016-10-3-blog-imageThe presidential debate, surging oil prices, and concerns about a global bank all took their toll on the market last week; however, we were pleased to see a positive quarter end for stocks. For the week, the S&P 500 gained 0.17%, the Dow grew 0.26%, the NASDAQ edged up 0.12%, but the MSCI EAFE lost 0.87%.

Why did Deutsche Bank affect markets?

Last week, concerns about one of the world’s largest banks caused investors to worry that a new “Lehman moment” might spark a new financial crisis. Germany’s scandal-prone banking giant is facing financial penalties in the U.S. for the role it played in the financial crisis; the bank’s problems are causing key clients to distance themselves and analysts wonder about the firm’s financial health. Investors reacted to Deutsche Bank’s woes negatively, setting off a 200-point drop in the Dow Jones Industrial Average on Thursday.

A similar loss of confidence in Lehman Brothers in 2008 caused counterparties (major clients) to ask the cash-strapped firm for their money back, triggering its collapse and the beginning of the financial crisis. However, Deutsche Bank is not Lehman, and the world is a different place than it was in late 2008. International financial institutions are not as dangerously interconnected as they were then, and global regulators are much better positioned to respond to situations that arise.

Markets agreed with that assessment and rebounded on Friday. While news from Deutsche Bank may still create headlines, we think the worst has passed. If you have any questions about Deutsche Bank or other financial firms, please reach out to us so we can respond to your concerns.

What does the data say about the economy in the third quarter?

With the third quarter officially in the rearview mirror, analysts are turning their attention to the data. Here’s what we know so far:

The third estimate of second-quarter economic growth showed that Gross Domestic Product (GDP) grew a stronger-than-expected 1.4%, up from initial estimates. Even better, some economists think the economy could have accelerated and grown 2.8% in the third quarter, which would put it closer to the pace we want to see. The latest September data on consumer sentiment, an important indicator of future consumer spending, shows that Americans are more confident in their financial prospects, possibly opening the door to higher spending in the critical holiday shopping season.

What might the final months of the year bring?

As we enter the final three months of 2016, markets are contending with some headwinds we’re watching. We can expect plenty of headlines around the presidential election as we get closer to November. Political beliefs aside, elections represent a lot of uncertainty, especially with wild-card candidates. Markets may react with relief after election uncertainty resolves; however, concerns about the changes a new administration will bring may also trigger further volatility.

Britain’s prime minister announced her intention to begin negotiating the UK’s Brexit from the European Union next spring. By 2019, Britain could be a sovereign nation once again, bringing a slew of changes to the EU. Ultimately, we don’t expect to see too much volatility around the Brexit until next year.

Oil prices might have finally hit bottom and be poised to rally this fall. Major oil producers, including Saudi Arabia and Iran, seem ready to coordinate production to bring oil prices back up. If a pact is made (and held), oil could head back toward $60/barrel next year, which would bring relief to beleaguered U.S. energy companies. However, higher oil process could bite consumers by making gas more expensive at the pump. It’s likely that oil prices will play a role in market movements in the weeks to come.

The week ahead is packed with data, including the September jobs report, which may factor into future Federal Reserve interest rate decisions. As always, we’ll keep you updated.


Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Wednesday: ADP Employment Report, International Trade, Factory Orders, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation



New home sales tumble in August. Sales of newly constructed homes fell 7.6% in August after surging in July to the highest level in nearly nine years. The retreat isn’t unexpected and further volatility in the housing sector may occur.

Durable goods orders slip. U.S. factories saw fewer orders in August for long-lasting goods like aircraft, appliances, and electronics. However, a core category that represents business investment grew for the third straight month.

Weekly jobless claims edge higher. The number of Americans filing new claims for unemployment benefits rose slightly last week but held at stable levels, supporting the view that the labor market continues to improve.

Pending home sales drop. The number of homes under contract slumped in August, suggesting that home sales fell across the board. Since pending sales forecast future activity, it’s likely the drop in housing activity will be felt in the weeks ahead.

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


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%.


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.


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



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


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 ( 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!


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



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.


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.


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



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.


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



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.

LIBOR Surge May Rule Out September Fed Rate Hike – Weekly Update for August 29, 2016

LIBOR Surge May Rule Out A Fed Rate Hike

After rallying for weeks, the major indexes fell last week ahead of key remarks by Federal Reserve officials and turbulence in money markets.[i] For the week, the S&P 500 lost 0.68%, the Dow fell 0.85%, the NASDAQ dropped 0.37%, while the MSCI EAFE gained 0.16%.[ii]

Even as the Fed has kept interest rates flat, an unexpected surge in short-term interest rates triggered by an industry rule change is potentially doing some of the Fed’s work for it. If you ever tune in to the financial news, you may have heard the term LIBOR (pronounced LIE-bor) mentioned in reference to money markets (what we call the trade of short-term loans between banks and other financial institutions).

LIBOR, the London Interbank Offered Rate, is a benchmark used for a vast range of debt, including mortgages and corporate loans. Recently, the three-month LIBOR (the rate charged for lending dollars for three months) has reached multi-year highs (rising more than 30% since this June), tightening credit conditions without any action by the Fed.[iii]

Why should you care about LIBOR? Well, since you’re not a bank, LIBOR may not directly impact your life. However, since it’s tied to an estimated $300 trillion in global financial securities like corporate bonds and mortgages, it definitely affects your personal bottom line.[iv]

Even when the Fed holds rates steady, other events can impact the interest rates we see. Restructuring related to a money market rule change is causing interest rates to rise, making it more expensive for institutions to lend to each other (and to borrowers like us).

In terms of overall impact, LIBOR’s recent spike has the equivalent impact of a small (25 basis point) rate hike by the Fed.[v] While there’s no telling how long the surge in rates will last, some analysts think that the money market turbulence will be enough to rule out an interest rate increase when the Fed meets in September.[vi]

However, there are also larger stability issues the Fed has to consider. Even if a short-term rise in interest rates reduces the immediate need to raise rates, the Fed is charged with maintaining long-term stability, and may choose to act anyway.

The latest data on economic growth proved to be a disappointment. The second estimate of Gross Domestic Product growth showed that the economy grew a tepid 1.1%, trimming the previous estimate of 1.2%. While consumer spending was revised upward, businesses pulled back their spending significantly, putting the brakes on growth.[vii] Will the disappointing economic growth stave off a September rate increase? Probably, but we can’t be certain.

Investors are reacting predictably to the uncertainty by holding back and waiting for more information. When trading volume is low, even minor headlines can have an outsized effect on market movements. With the next Federal Open Market Committee Meeting three weeks away, we expect to see additional volatility as investors consider the odds of a new rate hike.


Monday: Personal Income and Outlays, Dallas Fed Manufacturing Survey

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

Wednesday: ADP Employment Report, Chicago PMI, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Motor Vehicle Sales, Jobless Claims, Productivity and Costs, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Friday: Employment Situation, International Trade, Factory Orders



New home sales skyrocket. Sales of new single-family homes rose unexpectedly in July, reaching their highest level in almost nine years as demand for houses rose.[viii]

Existing home sales tumble. Home resales fell last month for the first time since February as shrinking inventory limited buyer activity. However, as wages and home prices rise, resales will likely pick up later this year.[ix]

Durable goods orders bounce in July. Orders for long-lasting factory goods rebounded last month, indicating the manufacturing sector may be strengthening.[x]

Consumer sentiment slips in August. A gauge of how Americans feel about the economy and their financial prospects fell. A drop in optimism could foretell weaker consumer spending this quarter.[xi]