Is Fed ending ‘easy money’ era |

Is Fed ending ‘easy money’ era

Ken Armstrong, Shane Fleury & Steve Shanley
The Northwestern Mutual Wealth Management Company – Vail Valley

In a trading week shortened by the Labor Day holiday, the three major United States stock indexes all gained at least 2 percent as investors and analysts seemed to think the Federal Reserve wasn’t ready to end the “easy money” era just yet and would hold off raising its benchmark rate until later this year, at its meeting in October or December.

Indeed, The Wall Street Journal’s latest survey of 64 economists found that only 46 percent of the respondents thought the Fed would act at its meeting this week; in early August, before concern about China rattled stock markets, 82 percent of those surveyed predicted the Fed would raise its benchmark rate in September. Either way, this week’s two-day meeting will be followed by a press conference conducted by the Fed’s Chairwoman Janet Yellen, where, as an advocate of transparency, she may offer further insight as to why the Fed raised its rate, or why it decided to hold off.

China and equities

Stocks surged Sept. 8 despite the news that China’s exports fell 5.5 percent in August from a year earlier and that imports were down for the 14th month straight, off 14 percent. Equities began Wednesday of last week on the upswing, as well, partly because China’s Premier Li Keqiang said his nation’s GDP growth was in the “proper range” and that there were no plans for further currency devaluations. Stocks dipped later in the day, however, when the U.S. government announced that the number of job openings rose 8 percent in July to 5.75 million, the highest total since record-keeping began, which was good news unless you were hoping that the Fed would put off its rate increase. Equities were given a boost at week’s end by a decline in the price of oil and the fact that Apple’s shares climbed 2.2 percent the day after it unveiled its newest iPhones and iPads.

China’s big spending

Though it still has the world’s largest foreign currency reserve at $3.56 trillion, China has been cashing it in at an unprecedented rate as it tries to stabilize the renminbi and its stock markets, spending $94 billion in August.

Back to business

Congress returned from its summer recess and has to address funding the government, with the current stop-gap plan expiring on Oct. 1. The two sides of the aisle, already miles apart on spending and taxes, will be even less likely to cooperate with one another after President Obama’s seeming success in passing his nuclear pact with Iran, which has left the GOP irate.

The budget deficit dips

Meanwhile, the budget deficit fell to its lowest level in almost seven years. For the 12 months ending in August, the deficit was $424 billion, 2.4 percent of GDP; a year ago, it was $514 billion and 2.9 percent of GDP. The Congressional Budget Office expects the deficit for the fiscal year ending on Sept. 30 to be $426 billion, down 11.8 percent from last year and the lowest total since 2007.

Puerto Rico’s austerity plan

Puerto Rico unveiled its five-year plan to battle bankruptcy, with Governor Alejandro Garcia Padilla delivering an us versus them message that was right out of Greece’s playbook, saying, “We may be publicly attacked by outside interests who will want to force us to pay. They will attack us because they’ll want to see us on our knees.” He warned creditors that not accepting the plan would “result in years of litigation and defaults, and a major humanitarian crisis.”

Around the eurozone

The euro-area economy grew more than first reported in the second quarter, driven by exports and consumer spending, with GDP up 0.4 percent compared to the original estimate of 0.3 percent. In a statement that will conciliate Germany but may agitate member nations already concerned about the sway of the European Central Bank, it offered further details about the Single Supervisory Mechanism designed to oversee banks and manage bank failures, saying it would override national banking rules that conflicted with its policies.

Consumer borrowing hit new high

Consumer borrowing hit a new high of $3.45 trillion in July after rising $19.1 billion, the biggest one-month gain since November 2001. In other news, import prices dipped 1.8 percent in August, mainly because of cheaper oil, and were down 11.4 percent over the previous year, the largest decline since September 2009. Wholesale inventories fell in July for the first time in almost two years, down 0.1 percent after an increase of 0.7 percent in June. The Producer Price Index (PPI) continued to inch along at a pace well below the Fed’s target of 2 percent for inflation, coming in flat in August and off 0.8 percent over the past year; core PPI, less food and energy, was up 0.3 percent in August and 0.9 percent for the last 12 months. Weekly jobless claims fell 6,000 to 275,000, while the four-week moving average added 500 to end at 275,750. In a sign that the recent volatility may be taking a toll on the psyche of investors, the preliminary University of Michigan Consumer Sentiment Index for September came in at 85.7, below the forecast and down from 91.9 in August.

A look ahead

Yes, there will be other economic releases of consequence this week, though few are likely to focus on them after the Fed’s rate decision on Thursday, including updates on retail sales, industrial production and capacity utilization, business inventories, the Consumer Price Index, housing starts and building permits

This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

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