AMERIPRISE FINANCIAL, INC.
Uncertainty Looms After Fed Calls Q1 Headwinds 'Transitory'
05/04/2015 | David Joy
Much of last week's economic focus was on the first quarter U.S. GDP report, which registered barely positive growth, at least in the first estimate. Although the 0.2 percent annualized growth rate was at the lower end of the range of expectations, the overall weakness didn't surprise anyone. The now familiar but nevertheless influential culprits of cold weather, West Coast port closures and the strong dollar were blamed.
Despite the widely anticipated sluggish nature of the report, stocks stumbled after the Federal Reserve acknowledged the "transitory" nature of the economy's first quarter headwinds, leaving investors uncertain about when the first interest rate hike is likely to occur. And although the weak first quarter data may have made a June increase less likely in the minds of some, that conclusion was not universal. Later in the week, the presidents of the San Francisco and Cleveland Federal Reserve banks said that the June meeting was still on the table for the first increase if the data between now and then is strong enough.
All Eyes Will be on Friday's April Jobs Report
This so-called "data dependency" will intensify with Friday's April jobs report. Forecasters are anticipating a solid rebound from the weak March report, which saw job growth of just 129,000 after an average growth rate of 283,000 over the previous five months, and a drop in the unemployment rate from 5.9 to 5.5 percent.
The consensus expectation is calling for the creation of 225,000 new no-farm jobs and for the unemployment rate to fall to 5.4 percent. As important as these headline numbers are, the pace of average hourly earnings growth also will be closely watched. In March, earnings year-over-year grew at just a rate of 2.1 percent, certainly not high enough to indicate general tightness in the labor market, nor high enough to raise concerns about rising inflationary pressures.
However, the monthly increase in March was 0.3 percent, which raised the annualized rate of growth in hourly earnings in the first quarter to 4.0 percent, high enough to catch everyone's attention, including the Fed's, if it is sustained. In addition, we learned last week that the employment cost index, a broader measure of worker compensation that also includes benefits, rose by 0.7 percent, bringing the twelve month gain in the wages component to 2.8 percent, the highest in six years.
Housing Could be a Bright Spot
There was another economic report last week that fell somewhat under the radar screen suggesting that second quarter activity could get a stronger boost from the housing sector. The pace that households were created in the U.S. rebounded sharply for the second consecutive quarter, after having collapsed in the wake of the financial crisis. The implications for the housing activity, including new construction, could be significant and suggest an accelerated pace of the so far moderate rebound in the sector.
Big Swings Last Week: The Dollar, Commodity Prices, Bond Yields and the Eurozone
The conflict between the weakness in the reported data and the anticipation of future improvement caused markets to swing widely last week. Most notably, the dollar weakened, especially versus the euro, and commodity prices rose, as did bond yields. The U.S. ten-year note yield jumped from 1.91 to 2.11 percent, its highest level since mid-March. The yield on the two-year note rose from 0.51 to 0.59 percent. U.S. stocks slipped slightly on the week, but the expectation of firming growth kept the losses to a minimum, while the stronger euro took a toll on equities in the Eurozone, pushing prices lower by more than 2.6 percent for the week and resulting in the first monthly decline of the year. Expect these competing forces to continue to exert their influence in the coming weeks, especially if what now may be a nascent concern over rising inflationary pressure becomes more acute.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Employment Cost Index is quarterly report from the U.S. Department of Labor that measures the growth of employee compensation (wages and benefits). The index is based on a survey of employer payrolls in the final month of each quarter.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
05/04/2015 | David Joy
Much of last week's economic focus was on the first quarter U.S. GDP report, which registered barely positive growth, at least in the first estimate. Although the 0.2 percent annualized growth rate was at the lower end of the range of expectations, the overall weakness didn't surprise anyone. The now familiar but nevertheless influential culprits of cold weather, West Coast port closures and the strong dollar were blamed.
Despite the widely anticipated sluggish nature of the report, stocks stumbled after the Federal Reserve acknowledged the "transitory" nature of the economy's first quarter headwinds, leaving investors uncertain about when the first interest rate hike is likely to occur. And although the weak first quarter data may have made a June increase less likely in the minds of some, that conclusion was not universal. Later in the week, the presidents of the San Francisco and Cleveland Federal Reserve banks said that the June meeting was still on the table for the first increase if the data between now and then is strong enough.
All Eyes Will be on Friday's April Jobs Report
This so-called "data dependency" will intensify with Friday's April jobs report. Forecasters are anticipating a solid rebound from the weak March report, which saw job growth of just 129,000 after an average growth rate of 283,000 over the previous five months, and a drop in the unemployment rate from 5.9 to 5.5 percent.
The consensus expectation is calling for the creation of 225,000 new no-farm jobs and for the unemployment rate to fall to 5.4 percent. As important as these headline numbers are, the pace of average hourly earnings growth also will be closely watched. In March, earnings year-over-year grew at just a rate of 2.1 percent, certainly not high enough to indicate general tightness in the labor market, nor high enough to raise concerns about rising inflationary pressures.
However, the monthly increase in March was 0.3 percent, which raised the annualized rate of growth in hourly earnings in the first quarter to 4.0 percent, high enough to catch everyone's attention, including the Fed's, if it is sustained. In addition, we learned last week that the employment cost index, a broader measure of worker compensation that also includes benefits, rose by 0.7 percent, bringing the twelve month gain in the wages component to 2.8 percent, the highest in six years.
Housing Could be a Bright Spot
There was another economic report last week that fell somewhat under the radar screen suggesting that second quarter activity could get a stronger boost from the housing sector. The pace that households were created in the U.S. rebounded sharply for the second consecutive quarter, after having collapsed in the wake of the financial crisis. The implications for the housing activity, including new construction, could be significant and suggest an accelerated pace of the so far moderate rebound in the sector.
Big Swings Last Week: The Dollar, Commodity Prices, Bond Yields and the Eurozone
The conflict between the weakness in the reported data and the anticipation of future improvement caused markets to swing widely last week. Most notably, the dollar weakened, especially versus the euro, and commodity prices rose, as did bond yields. The U.S. ten-year note yield jumped from 1.91 to 2.11 percent, its highest level since mid-March. The yield on the two-year note rose from 0.51 to 0.59 percent. U.S. stocks slipped slightly on the week, but the expectation of firming growth kept the losses to a minimum, while the stronger euro took a toll on equities in the Eurozone, pushing prices lower by more than 2.6 percent for the week and resulting in the first monthly decline of the year. Expect these competing forces to continue to exert their influence in the coming weeks, especially if what now may be a nascent concern over rising inflationary pressure becomes more acute.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Employment Cost Index is quarterly report from the U.S. Department of Labor that measures the growth of employee compensation (wages and benefits). The index is based on a survey of employer payrolls in the final month of each quarter.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
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