AMERIPRISE FINANCIAL, INC.
What has the Fed Been Missing?
05/27/2015 | David Joy
Fed chair Janet Yellen reminded us last Friday that we can expect an interest rate hike this year. Vice-chair Stanley Fischer, while admonishing us not to fixate on when that first rate hike might occur, reiterated that the timing remains data dependent. If you look at the Fed's dual mandate of full employment and stable prices, an argument could be made that those conditions have already been met.
The Fed thinks the longer-run level of normal unemployment is 5.0-5.2 percent. The current rate is 5.4 percent. As for inflation, the core Consumer Price Index (CPI) has edged higher this year to 1.8 percent in April, not far from the Fed's objective of 2.0 percent. The headline number is still too low at -0.2 percent, but the impact of falling oil prices will soon begin to wear off. The core Personal Consumption Expenditure (PCE) is currently 1.3 percent, arguably a bit low as well, but it too has edged higher in the past two months.
The Fed Waits for Confidence in the Economy
What the Fed is missing so far seems to be the confidence that the economy is growing strongly enough to sustain these job and price trends. It seems to believe the underlying rate of growth is sufficiently strong, but that transitory headwinds have conspired to prevent the economy from showing that strength, particularly in the first quarter.
The problem is that the impact of these transitory headwinds, including winter weather and bottled-up goods movement on the West Coast, should probably have dissipated by now and the economic data should have firmed. Unfortunately, the second quarter has also gotten off to a sluggish start, except for a strong report on housing starts in April. This has resulted in economic projections for second quarter GDP being revised lower and expectations for the timing of the first rate hike to be pushed out a little longer.
A Short Week Full of Economic Data
The good news for data watchers is that this week's economic calendar is loaded with scheduled reports that will help to clarify the current state of the economy. The durable goods orders report for April was released on Tuesday and it was encouraging. The headline number declined, but was higher for the second straight month after six months of declines (when backing out the volatile transportation component). And the non-defense ex-aircraft category, a good proxy for private sector capital spending, also rose strongly for the second straight month.
This week, the important housing sector includes reports on prices, new home sales and pending sales. While the recovery in housing is on track, the pace remains frustratingly slow. Prices have risen while inventories remain scarce and wage growth remains subdued. The monthly new sales data is choppy, but as expected sales rebounded from March's 11.4 percent decline with a 6.8 percent advance.
On Thursday, pending sales are expected to rise for the fourth straight month. We also get a look at a revised look at Q1 GDP, consumer confidence and the final reading from University of Michigan's consumer sentiment survey. Expect the GDP report to be revised lower, perhaps to a decline of -0.9 percent at an annualized rate from the initial estimate of a 0.2 percent increase.
Consumer sentiment seems to have been tracking the price of oil lately, or more accurately, the price of gasoline. Sentiment began to soar in mid-summer last year as the price of oil and gasoline began to fall, and kept on rising through January. As energy prices then began to rise, sentiment began to slip, rising briefly in April before falling again in May. According to AAA, last June the national average for a gallon of regular unleaded was $3.68. At the low in January it was $2.09. It is currently $2.69.
Negotiations Continue for Greece
In the Eurozone, negotiations between Greece and its creditors continue, with both sides seemingly digging in their heels. Greece is fast approaching a series of payments due to the International Monetary Fund (IMF) beginning on June 5, as well as payments due to its own civil servants and pensioners, which it has said will take priority.
The problem is that Greece doesn't appear to have enough funds to satisfy all of these claims without additional bailout funds, which will not be released without a deal. So, obviously some sort of resolution, even a temporary arrangement, must be reached soon. The yield on ten-year Greek bonds has climbed 135 basis points, to 11.55 percent, in just the last two weeks.
Interestingly, however, Eurozone equity markets have shown relatively little concern, tracking more closely the path of the Euro. The Euro Stoxx 50 index has risen 2.3 percent in local currency terms during the same timeframe as the rise in Greek bond yields, as the euro has cheapened versus the dollar from 1.14 to 1.09. Of course, an unfavorable outcome in the negotiations will cause some disruption and likely result in a flight to safety, but should not inflict irreparable damage on the rest of the Eurozone.
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 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.
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.
05/27/2015 | David Joy
Fed chair Janet Yellen reminded us last Friday that we can expect an interest rate hike this year. Vice-chair Stanley Fischer, while admonishing us not to fixate on when that first rate hike might occur, reiterated that the timing remains data dependent. If you look at the Fed's dual mandate of full employment and stable prices, an argument could be made that those conditions have already been met.
The Fed thinks the longer-run level of normal unemployment is 5.0-5.2 percent. The current rate is 5.4 percent. As for inflation, the core Consumer Price Index (CPI) has edged higher this year to 1.8 percent in April, not far from the Fed's objective of 2.0 percent. The headline number is still too low at -0.2 percent, but the impact of falling oil prices will soon begin to wear off. The core Personal Consumption Expenditure (PCE) is currently 1.3 percent, arguably a bit low as well, but it too has edged higher in the past two months.
The Fed Waits for Confidence in the Economy
What the Fed is missing so far seems to be the confidence that the economy is growing strongly enough to sustain these job and price trends. It seems to believe the underlying rate of growth is sufficiently strong, but that transitory headwinds have conspired to prevent the economy from showing that strength, particularly in the first quarter.
The problem is that the impact of these transitory headwinds, including winter weather and bottled-up goods movement on the West Coast, should probably have dissipated by now and the economic data should have firmed. Unfortunately, the second quarter has also gotten off to a sluggish start, except for a strong report on housing starts in April. This has resulted in economic projections for second quarter GDP being revised lower and expectations for the timing of the first rate hike to be pushed out a little longer.
A Short Week Full of Economic Data
The good news for data watchers is that this week's economic calendar is loaded with scheduled reports that will help to clarify the current state of the economy. The durable goods orders report for April was released on Tuesday and it was encouraging. The headline number declined, but was higher for the second straight month after six months of declines (when backing out the volatile transportation component). And the non-defense ex-aircraft category, a good proxy for private sector capital spending, also rose strongly for the second straight month.
This week, the important housing sector includes reports on prices, new home sales and pending sales. While the recovery in housing is on track, the pace remains frustratingly slow. Prices have risen while inventories remain scarce and wage growth remains subdued. The monthly new sales data is choppy, but as expected sales rebounded from March's 11.4 percent decline with a 6.8 percent advance.
On Thursday, pending sales are expected to rise for the fourth straight month. We also get a look at a revised look at Q1 GDP, consumer confidence and the final reading from University of Michigan's consumer sentiment survey. Expect the GDP report to be revised lower, perhaps to a decline of -0.9 percent at an annualized rate from the initial estimate of a 0.2 percent increase.
Consumer sentiment seems to have been tracking the price of oil lately, or more accurately, the price of gasoline. Sentiment began to soar in mid-summer last year as the price of oil and gasoline began to fall, and kept on rising through January. As energy prices then began to rise, sentiment began to slip, rising briefly in April before falling again in May. According to AAA, last June the national average for a gallon of regular unleaded was $3.68. At the low in January it was $2.09. It is currently $2.69.
Negotiations Continue for Greece
In the Eurozone, negotiations between Greece and its creditors continue, with both sides seemingly digging in their heels. Greece is fast approaching a series of payments due to the International Monetary Fund (IMF) beginning on June 5, as well as payments due to its own civil servants and pensioners, which it has said will take priority.
The problem is that Greece doesn't appear to have enough funds to satisfy all of these claims without additional bailout funds, which will not be released without a deal. So, obviously some sort of resolution, even a temporary arrangement, must be reached soon. The yield on ten-year Greek bonds has climbed 135 basis points, to 11.55 percent, in just the last two weeks.
Interestingly, however, Eurozone equity markets have shown relatively little concern, tracking more closely the path of the Euro. The Euro Stoxx 50 index has risen 2.3 percent in local currency terms during the same timeframe as the rise in Greek bond yields, as the euro has cheapened versus the dollar from 1.14 to 1.09. Of course, an unfavorable outcome in the negotiations will cause some disruption and likely result in a flight to safety, but should not inflict irreparable damage on the rest of the Eurozone.
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 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.
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.
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