Will the Fed raise rates this year?
Courtesy of Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company — Vail Valley
Once again, stock indexes edged to new highs last week. There was no real impetus for the ascent, especially with mixed news about the housing sector and an impasse in the negotiations between Greece and its creditors.
In addition, Federal Reserve’s Chairwoman Janet Yellen said she expected the Fed to raise its benchmark rate before year’s end. At mid-week, the release of the minutes of the Fed’s meeting of April 28 and 29 indicated that the slowing economy had pushed the timetable for raising the benchmark rate back from June. Yet the Fed was expected to act as soon as September because, Yellen said, “Most participants expected that, following the slowdown during the first quarter, real economic activity would resume expansion at a moderate pace.” Then on Friday, speaking in Providence, Yellen confirmed the timetable, saying, “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” She also noted that it could be “several years” before the rate was back to normal, and opined that some of the recent economic weakness “may just be statistical noise.”
Core inflation bounces back
The Fed is mandated to manage inflation, which remains well below its target rate of 2 percent a year, and last week the Labor Department said the Consumer Price Index (CPI) was up only 0.1 percent in April after rising 0.2 percent in March. For the preceding 12 months, it was down 0.2 percent, the biggest drop since October 2009. However core CPI, less food and energy, rose 0.3 percent its biggest increase since January 2013, and was up 1.8 percent for the year. That reading, coupled with Ms. Yellen’s remarks, helped push the dollar to its biggest weekly jump against the euro in three years and drove up the yield on the 10-year Treasury.
The Greek drama continues
The situation in Greece remains far from resolved, with the country expected to run out of money by mid-June. Last week Prime Minister Alexis Tsipras met in Riga, Latvia, with his nation’s number one creditor, Germany’s Chancellor Angela Merkel, but she didn’t offer much hope, saying Greece ‘had “very, very intensive” work to do before an agreement was reached. Then over this past weekend Mr. Tsipras had to fight off a challenge from within his own party to stop paying creditors if they continued their “blackmailing tactics.” The measure was rejected by the Syriza Party’s central committee by a vote of 95-to-75.
Home construction soars, existing home sales dip
On Tuesday, the Dow reached a new high after the Commerce Department reported that home construction in April jumped 20.2 percent from March to an annual rate of 1.135 million, the highest total since November 2007 and the biggest month-to-month increase in almost 24 years. Whether it was an indication of a revived economy or simply a rebound after a brutal winter we have yet to know. In addition, building permits rose 10.1 percent to an annualized rate of 1,143,000. Still, with prices rising and fewer listings, sales of existing homes fell in April, the National Association of Realtors reported, down 3.3 percent from March to an annualized rate of 5.04 million. On a more positive note, over the last year, the median price of an existing home has climbed 8.9 percent to $219,400, closing in on its peak of $221,900 set in 2006. In other news, the National Association of Home Builders/Wells Fargo Index of builder sentiment fell to 54 in May from 56 in April – the reading is nonetheless up nine points from a year ago, and any reading above 50 indicates optimism. The Conference Board Leading Economic Index indicator rose 0.7 percent in April, the best showing since last July when it improved 1 percent. Plus the Labor Department announced that first-time jobless claims were up 10,000 to 274,000, while the four-week moving average fell to a 15-year low of 266,250.
The trade pact clears one hurdle
After intense lobbying and deal-making, the White House persuaded Senate Democrats to pass the president’s Pacific trade pact, giving him the power to fast-track the plan. This means the final bill would not be subject to amendments or filibusters, only to an up-or-down vote. However, as it stands now, the bill isn’t expected to pass if it returns to the Senate as currently written, and that assumes the fast-track motion gets through the House, where it’s going to be resisted by both Democrats and conservative Republicans. The 12-nation pact would include countries accounting for about 40 percent of global Gross Domestic Product, but not China.
The gas dividend
Despite the recent upswing in prices, the Energy Department said that the average household will spend about $650 less on oil and gas this year. Going into the Memorial Day weekend, the average price for a gallon of gas was $2.74, which was 91 cents lower than a year earlier.
Banks plead guilty, pay fines
Four banks, Citigroup, JPMorgan Chase, Barclays, and Royal Bank of Scotland, pleaded guilty to foreign currency manipulation and will pay a fine of $5.6 billion. A fifth bank, UBS, did not admit guilt to currency rigging, but will still pay part of that fine for manipulating the London Interbank Offered Rate (Libor.)
A look ahead
The holiday shortened week will include updates on durable and capital goods orders, the S&P/Case-Shiller Home Price Index, new and pending home sales, and Markit’s services and composite PMIs. The government will also update first-quarter GDP which is expected to fall from 0.2 percent into contraction at -0.9 percent (the government’s final estimate will come on June 24).
This commentary was prepared specifically for your wealth management advisor 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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