Will the Fed finally raise rates? | VailDaily.com

Will the Fed finally raise rates?

Weekly market commentary
Courtesy of Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company – Vail Valley

Investors seemed to take in stride the Federal Reserve's commitment to raising its benchmark rate this year, with all of the major indexes rising last week, although the Dow had a rough ride on Friday when Exxon Mobil and Chevron both posted their weakest quarterly earnings in more than a decade because of this year's oil glut. The Fed's determination to move ahead did impact bonds, with the yield on the 10-year Treasury tumbling on Friday on its way to posting its worst monthly performance since January.

After a two-day meeting, the Fed indicated that it was still planning to act if the economy continues to mend, perhaps at its next meeting in September. The committee reported that growth remained "moderate," resulting in "solid job gains and declining unemployment." At its June meeting, the Fed said it would wait to see "further improvement" before beginning to pare, but this time it slightly amended that language to read "some further improvements." Still, at week's end, some investors and analysts thought the Fed might hold off until December or even 2016 after the Labor Department said that the Employment Cost Index rose only 0.2 percent in the second quarter. It is the smallest increase since the government began tracking the data in 1982 (it was up 0.7 percent in the first quarter). Wages and salaries also gained just 0.2 percent, the smallest advance on record. However, on Friday, James Bullard, the president of the Federal Reserve Bank of St. Louis, told The Wall Street Journal that, even after that report, "we are in good shape" for a hike in September.

Back in business, sort of

Shuttered since June 29, Greece announced that its stock markets will reopen with some important constraints, most notably that investors will only be able to use available capital to make new investments, not fund them by withdrawing money from banks. Greece was also in the news when recordings of a July 16 meeting revealed that then Finance Minister Yanis Varoufakis had discussed a "Plan B" whereby Greece would leave the eurozone and establish an alternative banking system with a parallel currency. These facts may raise some hackles as creditors head for Athens to work on the details of the latest bailout package. Even so, the eurozone's economic confidence hit a four-year high of 104 in June after the possibility of a "Grexit" was averted, however narrowly.

The trade pact teeters

In June, President Obama galled some of his fellow Democrats when he partnered with Republicans to advance his Trans-Pacific trade pact, which would include countries responsible for 40 percent of global GDP. However, progress stalled last week when participating countries couldn't agree on issues involving market access and protectionism. The president had hoped the meeting in Hawaii would wrap up the final details so that he could take the bill to Congress this year.

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China's stocks still in freefall

On Monday, American stock indexes fell after China's Shanghai Index plummeted 8.5 percent, its biggest one-day drop since February 2007. Stock prices had recently stabilized, and the new drop cast some doubt on the effectiveness of the government's recent efforts to reassure investors that a stock bubble isn't imminent. The bull run over the past year has largely been fueled by investors using borrowed money to buy stocks.

Growth rebounds, somewhat

In its first estimate, the government reported that GDP growth rebounded to 2.3 percent in the second quarter, progress after a weak 0.6 percent expansion for the first three months of the year but nonetheless short of the consensus forecast of 2.9 percent. The rise came in large part because exports, hurt in the first quarter by the strong dollar and the slowdown in West Coast ports, which shaved almost 2 percent off growth, rebounded to add 0.13 percent. In addition, consumer spending was up 2.9 percent after gaining 1.8 percent in the first quarter. In other economic news, orders for durable goods bounced back from a -2.1 percent dip in May, gaining 3.4 percent. The Commerce Department said that orders for core capital goods – nonmilitary goods, excluding aircraft – a closely watched metric, were up 0.9 percent in June after having fallen 0.4 percent in May. With investors worried about Greece and China, The Conference Board's Consumer Confidence Index, forecast to hit triple digits, instead fell all the way to 90.9 in July, its lowest reading since September 2014. The University of Michigan's Consumer Sentiment Index also dipped, down to 93.1 in July from 96.1 in June. The S&P/Case-Shiller Home Price Index for 20 major metro areas, which encompasses almost half of all American homes, rose 4.9 percent from last May, the same pace as in April. But a limited supply of homes hurt pending sales, the National Association of Realtors reported, with its index dropping 1.8 percent in June to 110.3, though it was up 8.2 percent over the last year. In addition, first-time jobless claims were down 12,000 to 267,000, while the four-week moving average fell 3,750 to 274,750. Lastly, after its most recent round of fundraising, Uber's value soared to $51 billion, with Microsoft reportedly among the most recent investors.

A look ahead

Though the first debate amongst GOP candidates may provide some fireworks this week, Congress and Europeans are getting set for their summer vacations, so it should be relatively quiet. That is, until Friday when the Labor Department issues its unemployment report for July. The household rate is expected to remain unchanged at 5.3 percent, its lowest level since 2008. Other releases will include the latest on personal income and spending, the ISM's Manufacturing and Nonmanufacturing Indexes, construction spending, vehicle sales, factory orders, the trade balance and consumer credit.

This commentary was prepared specifically for local wealth management advisors 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.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor's 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Standard & Poor's offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor's and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor's and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.