Will the Fed raise rates in June?
The Northwestern Mutual Wealth Management Company — Vail
Investors spent the first part of last week waiting for the minutes of the Federal Reserve’s April meeting to be released, and the rest of the week trying to decide what to make of the news that the Fed might raise its benchmark rate sooner than expected, perhaps as early as June.
The results were mixed, with the S&P 500 and Nasdaq up for the week while the Dow Jones Industrial Average dipped. The yield on the 10-year Treasury, meanwhile, rose to 1.85 percent, its sharpest one-week increase since last November.
Prior to the release of the Fed’s meeting minutes on Wednesday, the market expected that the June rate would be at 5 percent. However, by the end of the day, it had soared to 38 percent for June and 56 percent for July. In the minutes it was reported, “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it would likely be appropriate for the committee to increase the target range for the federal funds rate in June.” To underscore the point, it was also noted, “Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting.” As a result of these minutes, investors were uncertain whether to celebrate the Fed’s more positive take on the economy or worry about the impact of higher rates with stocks moving up, down and then up again over the last three days of the week.
Before the minutes were released, the government bolstered the case for a rate hike when it reported that the cost of living in April climbed faster than it had since February 2013, up 0.4 percent (the Fed’s mandate is to keep inflation in the 2 percent range, where it has not been in years). The Consumer Price Indexes (CPI) rose 0.4 percent in April from March and 1.1 percent year over year. Core CPI, less food and energy, climbed 0.2 percent in April and was up 2.1 percent from April 2015.
Oil and Apple
The Fed wasn’t the only story last week, although it seemed that way. On Tuesday the price of oil hit a six-month high after Goldman Sachs reported that the oil glut had turned into a “deficit.” This is partly because China’s crude production has fallen 5.6 percent in April from a year earlier at the same time that its oil refineries are posting record demand. Furthermore, the stock of Apple, the world’s largest company as measured by market capitalization and whose stock price had suffered after disappointing first-quarter earnings, jumped 3.7 percent on Monday. This was after it was reported that Warren Buffett’s Berkshire Hathaway had purchased almost $1 billion in Apple stock.
The International Monetary Fund digs in
The IMF is taking a stand over debt relief for Greece, squaring off against its fellow creditors and putting that nation’s next bailout payment at risk. The eurozone ministers will meet this week with the IMF reportedly looking to lower Greece’s payments and extend its debt timetable, steps that Germany is dead set against. Germany’s Finance Minister Wolfgang Schäuble said he saw “no argument” for changing the terms, and some analysts contend that the IMF is backing its case with an overly pessimistic picture of Greece’s financial plight. On Sunday, Greece’s parliament narrowly passed yet another round of austerity measures in the hope of persuading its creditors to unlock the next bailout payment.
A plan for Puerto Rico?
The House finally introduced a bill that would help Puerto Rico manage its $72 billion debt, but at the cost of direct fiscal control by an oversight board. Puerto Rican officials had previously decried such a plan as “imperialistic.” The plan would also override the bill Puerto Rico passed in April allowing it to default on its debt payments (as it did on May 1).
The debt story
Speaking of debt, United States credit card balances are on track to hit $1 trillion this year and perhaps close in on the all-time record of $1.02 trillion set in July 2008 as consumers seem to be more confident about jobs and their financial security. Last week, the Fed said that outstanding credit card balances rose to $952 billion in the first quarter, up 6 percent from a year earlier and the highest total since August 2009. Also, Experian reported auto loan debt passed the $1 trillion mark in the first quarter of this year, a new high. In other news, after having been down for two months straight, industrial production rose 0.7 percent in April from the month before; manufacturing was up 0.3 percent and capacity utilization increased 0.5 percent to 75.4 percent. The National Association of Realtors said that sales of existing homes increased 1.7 percent in April to an adjusted annual rate of 5.45 million; sales improved 6 percent from a year earlier. The national median home price was $232,500, 6.3 percent higher than it was from a year earlier, and the 50th consecutive monthly year-over-year increase. Housing starts rose 6.6 percent in April from March to 1.17 million, but were 1.7 percent below the pace of a year earlier. Building permits, up 3.6 percent in April to 1.11 million, were down 5.3 percent from April 2015. The National Association of Home Builders/Wells Fargo Housing Market Index of Builder Confidence was unchanged in May from the month before at 58. Lastly, first-time jobless claims for the week ending May 14 fell 16,000 to 278,000; the four-week moving average for the week ending May 7 rose 7,500 to 275,750.
A look ahead
This week’s updates will include the latest on new and pending home sales, durable and capital goods orders, consumer confidence and the advance trade balance. In addition, the government will release its second estimate of first-quarter gross domestic product (GDP), expected to be revised to 0.8 percent from the original 0.5 percent.The final reading will come on June 28, and the first estimate of second-quarter GDP will be released on July 29.
This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company®.
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Ferreira is a Ski & Snowboard Club Vail alum who is from Aspen. In accepting his gold medal, he shouted out boot fitter and ski tuner Dano Bruno of Gorsuch in Vail.