Will the Fed finally raise rates?
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.
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.
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