AMERIPRISE FINANCIAL, INC.
"Patient" No More, the Fed Will Focus on Labor Force, Inflation
03/24/2015 | David Joy
As expected, the Federal Reserve inched closer to its first interest rate hike since 2006 last week by dropping the word "patient" from its post-meeting statement. Having previously indicated that the word "patient" implied no rate hike at the two subsequent meetings, the Fed has now left open the possibility of a June increase.
The operative phrase for Fed watchers now becomes "data dependency." With the artificial constraint of restrictive forward guidance now removed, the Fed's future actions and their timing will depend upon the strength of the economic data, specifically regarding the labor force and inflation.
Between now and the Fed's June meeting, it will get three additional monthly jobs reports. And with unemployment currently at 5.5 percent, it did not want to find itself in June in the position of not being completely free to raise rates if unemployment had fallen significantly lower. Wage pressures have yet to emerge, but the fear is they may begin to do so soon.
As for inflation, the Fed says it wants to see prices rising at an annualized pace of 2.0 percent, well above the year-over-year increase in the January consumer price index of -0.1 percent. But the Fed has been right to focus on the core rate, excluding food and energy. Not that falling oil prices are meaningless, but they are likely temporary, and their impact on the monthly data can be quite volatile. For example, on Tuesday of this week, the February report on consumer prices is expected to show a monthly increase of 0.2 percent, compared to January's decline of 0.7 percent. The difference is that in February the price of oil rose 3 percent, while in January it fell by 9 percent. Meanwhile, the core rate is expected to have risen by 0.1 percent in February, only slightly below January's 0.2 percent increase.
The Dollar Cools Off
One immediate outcome of the Fed's meeting was some welcome relief of the upward pressure on the dollar. Despite a June rate hike now being possible but not necessarily likely, the dollar gave back some of its recent gains. Just prior to the release of the Fed's statement last Wednesday, the DXY U.S. Dollar Index was trading at a price of 99.60, and fell to 97.17 immediately thereafter. The euro climbed from 1.06 to 1.09. If the dollar stabilizes, some of the deflationary pressure on import prices will ease, as will the headwind on export prices. Emerging market currencies which have been under pressure will also get a reprieve, as commodity prices rose across the board as well.
Nor will investors with unhedged foreign exposure complain. For example, in the two days of trading following the Fed meeting, the EuroStoxx 50 index climbed 1.6 percent in euro terms, but 3.4 percent in dollars. And bond investors also cheered the Fed's actions, as the yield on the ten-year Treasury ended the week at 1.93 percent, down from 2.05 percent prior to the Fed meeting. And the two-year note fell to 0.58 from 0.67 percent.
Corporate Earnings Also in Focus
The renewed focus on economic data will also be accompanied by a focus on corporate earnings. And according to Factset, first quarter earnings for the S&P 500 are forecast to decline by 4.8 percent. Although that aggregate total is distorted by an expected 64 percent decline in the energy sector, earnings for utilities, materials, telecom, consumer staples, and technology are also expected to post declines compared to the first quarter of last year, while only healthcare, financials, consumer discretionary, and industrials are expected to report an increase. With severe winter weather having once again this year impacted activity in the first quarter, both the data and earnings may turn out to be on the soft side. The question will be whether investors view that as good news inasmuch as it keeps the Fed on the sidelines for longer.
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 U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
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.
© 2015 Ameriprise Financial, Inc. All rights reserved.
03/24/2015 | David Joy
As expected, the Federal Reserve inched closer to its first interest rate hike since 2006 last week by dropping the word "patient" from its post-meeting statement. Having previously indicated that the word "patient" implied no rate hike at the two subsequent meetings, the Fed has now left open the possibility of a June increase.
The operative phrase for Fed watchers now becomes "data dependency." With the artificial constraint of restrictive forward guidance now removed, the Fed's future actions and their timing will depend upon the strength of the economic data, specifically regarding the labor force and inflation.
Between now and the Fed's June meeting, it will get three additional monthly jobs reports. And with unemployment currently at 5.5 percent, it did not want to find itself in June in the position of not being completely free to raise rates if unemployment had fallen significantly lower. Wage pressures have yet to emerge, but the fear is they may begin to do so soon.
As for inflation, the Fed says it wants to see prices rising at an annualized pace of 2.0 percent, well above the year-over-year increase in the January consumer price index of -0.1 percent. But the Fed has been right to focus on the core rate, excluding food and energy. Not that falling oil prices are meaningless, but they are likely temporary, and their impact on the monthly data can be quite volatile. For example, on Tuesday of this week, the February report on consumer prices is expected to show a monthly increase of 0.2 percent, compared to January's decline of 0.7 percent. The difference is that in February the price of oil rose 3 percent, while in January it fell by 9 percent. Meanwhile, the core rate is expected to have risen by 0.1 percent in February, only slightly below January's 0.2 percent increase.
The Dollar Cools Off
One immediate outcome of the Fed's meeting was some welcome relief of the upward pressure on the dollar. Despite a June rate hike now being possible but not necessarily likely, the dollar gave back some of its recent gains. Just prior to the release of the Fed's statement last Wednesday, the DXY U.S. Dollar Index was trading at a price of 99.60, and fell to 97.17 immediately thereafter. The euro climbed from 1.06 to 1.09. If the dollar stabilizes, some of the deflationary pressure on import prices will ease, as will the headwind on export prices. Emerging market currencies which have been under pressure will also get a reprieve, as commodity prices rose across the board as well.
Nor will investors with unhedged foreign exposure complain. For example, in the two days of trading following the Fed meeting, the EuroStoxx 50 index climbed 1.6 percent in euro terms, but 3.4 percent in dollars. And bond investors also cheered the Fed's actions, as the yield on the ten-year Treasury ended the week at 1.93 percent, down from 2.05 percent prior to the Fed meeting. And the two-year note fell to 0.58 from 0.67 percent.
Corporate Earnings Also in Focus
The renewed focus on economic data will also be accompanied by a focus on corporate earnings. And according to Factset, first quarter earnings for the S&P 500 are forecast to decline by 4.8 percent. Although that aggregate total is distorted by an expected 64 percent decline in the energy sector, earnings for utilities, materials, telecom, consumer staples, and technology are also expected to post declines compared to the first quarter of last year, while only healthcare, financials, consumer discretionary, and industrials are expected to report an increase. With severe winter weather having once again this year impacted activity in the first quarter, both the data and earnings may turn out to be on the soft side. The question will be whether investors view that as good news inasmuch as it keeps the Fed on the sidelines for longer.
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 U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
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.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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