Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
In what could be a very worrying sign for the US economy, food prices are plummeting at their most consistent rate since 1960. Food prices have fallen for 9 straight months, and in some places in the country, a typical food basket costs 5% less than this time last year. At Aldi, for instance, eggs cost just 99 cents a dozen. “It starts to border on irrational pricing … People are lowering prices just to draw traffic, without thinking about their margins”, said a commentator from Bloomberg Intelligence. The industry seems to be suffering from a mix of strong competition and lower margins at the same time as consumers are growing more price sensitive.
FINSUM: While consumers have powered this recovery, at least in food they seem to be tightening their purse strings. What does this say about future corporate earnings? We are not very optimistic.
The world’s biggest fund managers feel under pressure to prove that they can meet a huge surge in investor redemption requests. Big managers like Vanguard are increasing their credit lines with banks in preparation of possible mass outflows of investor Dollars that could occur during a market plunge. Vanguard has recently increased its credit line to $3 bn, a $200m increase over last summer; the company oversees $3 tn in assets. Franklin Templeton has also set up a big credit line, to the tune of $2 bn. While the managers say it is a sensible approach to dealing with investor redemptions, regulators are increasingly worried about such credit lines because of their ability to create systemic risk in a crisis.
FINSUM: This is a very eye-opening story as it shows that big managers are growing more fearful of big investor redemptions, and at the same time, systemic risk is again increasing.
Source: Financial Times
US payroll data for August has just been released and the numbers aren’t good. Total US job creation fell to 151,000 last month, significantly below expectations of 180,000. The numbers are also way below last month’s blowout revised figure of 275,000. August does have a history of disappointing jobs numbers, but the new data may mean that a possible Fed rate hike next month will be delayed. Markets had been increasingly accepting the chances for a rate hike in September, but this might reverse market positioning. The unemployment rate held steady at 4.9%, while US wage gains slowed to 0.1% from 0.3% last month.
FINSUM: These numbers are not terrible by any means, but they do seem to a show a slowing economy rather than a rising one, which may deter the Fed.
The US economy continues to confound today, as new data shows that hiring once again surged in July, with 255,000 new jobs created in July versus expectations of just 180,000. The big gains follow very strong June numbers which were revised higher to 292,000. Hourly wages are increasing at a 2.6% annual clip and the unemployment rate held steady at 4.9%. The data comes following a dismal GDP report which showed the US was growing only around 1%, marking the third straight quarter of poor growth.
FINSUM: The market has been feeling “on again off again” about the Fed, and with these strong numbers it is now seeming more likely that a Fed hike in the near term might be possible.
For at least a few months the correlation between stocks and oil seemed to have been broken. However, as oil has recently moved sharply lower, briefly touching the $39 range, that correlation may be rising again. The oil market is currently plagued by a new kind of glut—refined products. It is key to remember that refineries, which turn oil into products like gasoline, are the only buyers of crude oil, and currently, they are cutting back. The market is presently seeing a huge glut of gasoline which has slowed down refinery buying, weakening the prospects for crude oil.
FINSUM: If oil continues to move lower, it could start to once again drag stocks down with it, though hopefully investors are sharp enough to realize that the issues are not necessarily representative of a doomed global economy.
Source: Wall Street Journal