Don’t bet on a Fed rate hike
September 6, 2016
Not so fast! Just when investors were getting comfortable with the idea of the Federal Reserve raising its benchmark rate for the first time since December (and only the second time since 2006), the worst jobs report since September 2010 seems likely to have taken any such step off the table for the near term – again.
The Fed had once expected to have as many as four quarter-point rate hikes this year. Then, in the face of an economy buffeted by the low price of oil and the slowdown in China, that number was reduced to two. Late last month the Fed's Chairwoman Janet Yellen and her fellow voting members indicated, given a more upbeat economic outlook, that the Fed could act as soon as mid-June, when it next meets. On Friday, however, the Labor Department reported that only 36,800 new jobs had been created, well below the forecast of 160,000 and the fewest in almost six years. The separately calculated household survey dropped from 5.0 percent to 4.7 percent, its lowest level in a decade, mainly because 458,000 people had dropped out of the workforce. This sent the labor force participation rate down to 62.6 percent – it had recently risen to 63 percent. The other asterisk is the fact that 35,000 striking Verizon workers were off the rolls in May but are now back on the job, which should help June's reading. Though the major indexes were all but unchanged for the week, the shares of banks, which had been on the rise along with the odds of a Fed hike, fell sharply on Friday and left the S&P 500 flat for the week, while the yield on the 10-year Treasury dropped more than ten basis points to close the week at 1.707 percent.
After the report was issued, Fed Governor Lael Brainard said that because of tentative signs of slowing in the labor market and other risks to the global economy, "we cannot take for granted the resilience of our recovery." Now the question investors will have to ponder yet again is what will it take for the Fed to pull the trigger and when; the odds of a June move fell from 21 percent on Thursday to 3.8 percent on Friday. They may get some idea today as Ms. Yellen is scheduled to speak in Philadelphia.
Mixed economic news
Prior to Friday's report, there had been some largely positive economic news. For example, the Commerce Department said that consumer spending increased 1 percent in April from March to $119.2 billion, the best month-over-month increase since August 2009. In addition, personal incomes rose 0.4 percent to $69.8 billion. The Personal Consumption Expenditures Index (PCE) for April was up 0.3 percent from the month before and 1.1 percent from a year earlier; the core PCE Index, less food and energy, gained 0.2 percent month over month and 1.6 percent from last April. On the housing front, the S&P/Case-Shiller Home Price Index for twenty major metro areas rose 5.4 percent in March from a year earlier. U.S. exports in April rose to their highest point this year, up 1.5 percent to $182.8 billion, as the dollar somewhat weakened. The flipside was that imports climbed 2.1 percent and the trade gap widened 5.3 percent to $37.44 billion. The Commerce Department reported that new orders for factory goods improved 1.9 percent in April from March, the best month since October; orders for core capital goods rose 0.4 percent. The Institute for Supply Management said its Manufacturing Index for April improved to 51.3 from 50.8 in April – any figure above 50 indicates expansion. Lastly, first-time jobless claims continued to come in below 300,000, falling 1,000 for the week ending May 28 to 267,000; the four-week moving average for the week ending May 21 fell 1,750 to 276,750.
In other, less positive economic news, the Commerce Department reported that construction spending in April fell by 1.8 percent from March, the most it has fallen in five years. The ISM's Non-Manufacturing Index for May dipped to 52.9 from April's 55.7, the lowest reading since February 2014, but still above 50. And a preliminary estimate from WardsAuto put May vehicle sales at 17.37 million, down 1.5 percent from a year earlier.
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Given the conflicting reports, it's not surprising that investors aren't quite sure what to make of the recent economic data. The Conference Board's Consumer Confidence Index fell from 94.7 in April to 92.6 in May, its lowest reading since November, just a week after the University of Michigan's Index hit a 2016 high in May.
European Central Bank stands pat
As expected, the European Central Bank (ECB) left its benchmark rate unchanged last week and also left in place the negative interest rate it charges banks to hold their money. Eurozone inflation in May was -0.1 percent but there's some hope that oil's rising toward the $50 mark will help in the coming months. The unemployment remained unchanged at 10 percent.
Japan puts the brakes on
In the latest sign of Japan's faltering economy, Japan's Prime Minister Shinzo Abe said he was postponing an increase in the national sales tax. In April 2014, he went ahead with a similar hike from 5 percent to 8 percent that led the country into recession when consumer spending ground to a halt. The two percentage point increase will be put off until October 2019.
Still no consensus on oil
Meeting in Vienna, Organization of the Petroleum Exporting Countries (OPEC) members once again failed to agree to a cap on production, perhaps comforted by oil's recent push to the $50-a-barrel mark. Khalid al-Falih, Saudi Arabia's new oil minister, said that oil producers should "let the market forces continue to seek and find that equilibrium between price and demand."
A look ahead
In addition to Yellen's speech today, this week will include updates on consumer credit, nonfarm productivity, wholesale inventories and household net worth.
This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company®.
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