The Fed Keeps Markets Jumping

The Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming, last week kept investors guessing. Stocks drifted lower during the week as early indications were that Fed Chair Janet Yellen would promise higher interest rates soon. Stock prices recovered after her speech, apparently because she didn’t mention a higher probability of a rate increase at the September meeting. Yellen said only that rate increases were likely over time and would be gradual.

Then, Vice Chairman Stanley Fischer said in a television interview that the data and Yellen’s speech were consistent with rate hikes in both September and December. Stocks quickly gave up the gains. Now, most analysts believe a September rate hike depends on the number of new jobs reported in tomorrow’s Employment Situation reports. They differ about the minimum number needed to trigger a rate increase, but agree that Fed officials will make their decision based on that report.

Of course, we’ve been down this road before. Fed officials have used words more than actions to affect the economy and markets. For about two years, Yellen and others on the Federal Reserve Board have repeatedly said the economy is strong enough for interest rates to begin the road back to normal levels. Yet, the only rate increase was 0.25% back in December. At other times, Fed officials cited international events and other factors as reasons to postpone rate increases.

In response to the recent rhetoric, the markets again are doing the Fed’s work for it, and it looks like our decisions to sell interest-rate-sensitive investments over the summer were good ones. Utility stocks are down about 7% from their July highs. Most interest-sensitive stocks and bonds also are down. Long-term treasury bonds are down about 1% in the last month, though they gained some value in the last week while most other bonds lost value.

The Data

The second estimate of second-quarter gross domestic product (GDP) declined a notch to a 1.1% annualized growth rate. That’s weak, but it’s also old news. The economy has moved on. More recent data indicate that the economy is doing better in the second quarter. Employment, housing and household data all indicate growth is at average or better levels.

The early employment reports indicate tomorrow’s Employment Situation reports should be positive. The ADP Employment Report said 177,000 private sector jobs were added in August. Also, July’s number was increased from 179,000 to 194,000.

New unemployment claims increased by 2,000, which was less than expected. The weekly claims and four-week averages remain near historic lows.

Consumer Sentiment, as measured by the University of Michigan, held fairly steady and remains near the highs of the recovery. The current conditions segment of the index is doing better than the expectations for one year and longer in the future.

But Consumer Confidence as measured by The Conference Board posted a nice gain to 101.1. This was well above expectations. Most components of the survey were positive.

The confidence is backed by the Personal Income and Outlays report. July’s household income increased 0.4%, and June’s increase was revised slightly higher than initially reported to 0.3%. Wages and salaries increased 0.5% for the second consecutive month.

Unlike many recent months, households chose to save some of that higher income instead of increasing spending by more than income increased. Consumer spending increased only 0.3%. Inflation as measured by the PCE Index was almost flat, and for the past 12 months core inflation is up 1.6%.

Another positive surprise came from the Dallas Fed Manufacturing Survey. While most of the other Fed surveys showed declines, the Dallas Fed Index jumped solidly into positive territory. A number of components of the survey were negative, so despite the positive headline number the survey should be classified as a mix of positive and negative news.

The Chicago PMI, on the other hand, had a sharp drop for the month. It still is at 51.5, and any reading above 50 indicates growth. The index was over 55 the two previous months and is volatile month-to-month.

Declining a little was the PMI Manufacturing Index. Its reading of 52.0 still indicates growth. But the ISM Manufacturing Index declined from 52.6 to 49.4. The new reading indicates a slight contraction in manufacturing nationally. This is the lowest reading since February, and this index has been firmly above 50 since February.

The second estimate of second-quarter Productivity and Costs is potential bad news for stocks. The decline in productivity moved from -0.5% to -0.6%. Also, unit labor costs increased sharply, from 2% to 4.3%. Paying substantially higher wages to produce fewer goods is not good for profit margins.

The housing data for the week were mixed. Housing prices continue to decline, according to the S&P Case-Shiller House Price Index. They declined only 0.1%, and the 12-month price increase is 5.1%.

Pending home sales are steady. The June Pending Home Sales Index was revised lower to register a 0.8% decline from May. But July sales increased 1.3% from the revised June number. The net result has led the PHS Index slightly higher than the initial June report.

The Markets

The Russell 2000 did best among major indexes, gaining 0.13% for the week ended with Wednesday’s close. The S&P 500 lost 0.22% for the week. The Dow Jones Industrial Average lost 0.39%. The All-Country World Index lost 0.76%. Emerging market stocks did worst of all the major indexes, losing 1.40%.

Despite all the talk about interest rate increases, long-term treasuries gained 0.12%. Investment-grade bonds lost 0.02%. Treasury Inflation-Protected Securities (TIPS) lost 0.15%. High-yield bonds returned 0.23%.

The dollar gained 1.31%.

Energy-based commodities lost 3.78%, largely due to reports of a glut in oil supply. Broad-based commodities lost 2.86%. Gold lost 1.33%.

Bob’s News & Updates

Recently I participated in a webcast on investing in gold. It was hosted by Doug Fabian, my colleague at Eagle Financial Publications and editor of Successful ETF Investing. Other participants included another Eagle colleague, Mark Skousen. You can view the webcast free.

If you’re in the Pittsburgh area on Sept. 20, consider attending my presentation to the Pittsburgh chapter of the American Association of Individual Investors (AAII). Details including registration information are here.

I’ll also be at the new MoneyShow Dallas, October 20-21. I’ll provide details later.

Some Reading for You

Apparently in Germany people are adjusting to negative interest rates by using home safes instead of banks.

The annual Fidelity Retiree Health Care Cost Estimate says that lifetime expected medical expenses for a 65-year-old couple increased again.

This survey indicates that a lot of people don’t want to live long lives. Read it to see who feels that way and why.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.