Stocks are still near record highs and Treasury bond yields remain near
record lows and are still flashing
The Fed held rates steady yet again, surprising no one. They said payrolls and other labor condition indicators have improved, but inflation is still low. Interestingly, the Fed also mentioned that they believe near-term risks have diminished. Like many, I’m not sure what that means, but it may be that since the financial markets recovered so quickly after the Brexit vote, all is well. This time around, the Fed statement seemed to have little impact on the markets.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on July 29, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
The Federal Reserve Left Rates Unchanged, Noted Declining Short-Term Risks… The central bankers kept overnight rates at 0.25% to 0.50% at their July
meeting, but their policy statement specifically highlighted diminished
economic risks in the U.S. The statement reiterated that the bankers are
monitoring overseas developments.
What it means – This is death by a thousand policy statements. Please, someone get the hook and yank all of the central bankers off stage. The markets are dragged around by the nose every time a Fed governor or president steps in front of a microphone, and yet for all the jawboning we’ve only had one rate hike since Bernanke created the “Taper Tantrum” in May of 2013.
The worst part is that this is a group of very smart people with access to more data and analysis than just about everyone else on the planet, and yet they still get it wrong. They're over-thinking this. It’s not hard: U.S. growth is slow at best, the world carries too much debt, the Japanese economy won’t recover, and the European Union is on life support.
Raising short-term rates won’t change any of that, but it could cause ugly volatility. Expect the Fed to raise rates once more this year just to protect their credibility, but it probably won’t push up long-term rates. Instead, the yield curve will flatten.
Second-Quarter GDP Disappoints at 1.2% on Expectations of 2.6%... First-quarter GDP was revised down from 1.1% to 0.8%.
What it means – Unlike other reports, this one is better than it seems. Inventory drawdowns cut 1.2% off of GDP. If they’d remained flat, GDP would have been 2.4%, much closer to expectations. Normally when inventories decline it’s seen as a positive for the following quarter because businesses have to restock. I’ll believe it when I see it. As I’ll discuss below, so far factory orders don’t show a big increase in the current quarter. It looks like we’re still just muddling along.
New Home Sales Surge, Up 25% over June 2015… Sales rose 3.5% for the month, reaching 592,000 units, the highest level since 2008.
What it means – Not only did sales spike, but the median selling price also jumped, from $288,000 to $306,000. These positive numbers are a stark contrast to the negative reports in April and May, and point to a solid foundation at least for new homes. But it’s not all sunshine and light.
This might be the highest rate of new home sales since 2008, but housing peaked in 2006 at levels more than double the current rate. Before 2008, new home sales hadn’t been this low since 1995.
S&P/Case-Shiller 20-City Home Price Index Down 0.1% in May, Up 5.2% Year-Over-Year… The annual growth rate fell 0.2% from 5.4% in April.
What it means – The 0.1% drop in May follows a revised 0.2% drop in April. If there were bigger declines, and the data wasn’t two months old, this would be worrisome. But the other housing data suggests the market picked up recently, so I expect these numbers to bounce a bit in June and July. Taken as a whole, housing data points to a steady, if muted, industry.
Home Ownership Fell from 63.5% to 62.9%... It’s the lowest home ownership rate since 1965, but has more to do with a rising number of renters than a falling number of owners.
What it means – This latest report from the Census Bureau just confirms my point that, while housing is improving slowly, it’s not on fire. Unfortunately, falling home ownership isn’t a good sign for the broad economy because it implies young people aren’t making the large commitment of buying homes. However, they are forming households. This rate compares the number of homeowners with the total number of households.
It’s not as if a bunch of people are selling their homes and not buying new ones. Instead, many more young people are renting their own place, not buying. This is a step in the right direction. We need young people creating households. That’s a step toward starting families, which is where the really big consumer spending starts.
June Durable Goods Orders Off 4.0%, Down 6.4% Over Last Year… Excluding aircraft, orders dropped 3.6% for the year, and core capital goods fell 3.7%.
What it means – We usually strip transportation out of durable goods to remove the volatile, high-cost aircraft industry. But today, it’s worth keeping this segment in the report. At the annual aircraft show held recently in England, Airbus and Boeing received the lowest number of orders for new planes in six years. This isn’t a monthly variation that will smooth out in the third quarter; it’s an ugly economic fact that will stick around.
Core capital goods, which excludes transportation and defense spending, fell for 17 of the last 18 months. There was bad news all over the place, with computer orders falling 9.1% and orders for communications equipment down 2.3%.
If this is what a robust recovery looks like, I'd hate to see a downturn!
Bank of Japan (BoJ) Disappoints, Holds Rates Steady and Fails to Add New Stimulus… The BoJ announced rates would remain at -0.10%.
What it means – This is going to leave a mark. The world expected more from the BoJ. The Japanese economy is in the dumps, the yen has appreciated 20% against the dollar since last fall, and the country hasn’t been able to generate inflation. The timing looked right to announce another bold plan. Instead, however, the markets got more of the same, with a slight increase in stock purchases by the BoJ. The central bankers did note that they were commissioning a study to determine the effectiveness of quantitative easing (QE) on economic growth. I think we can answer that one already… zilch. But, even though investors don’t believe in QE, they wanted the BoJ to do something.
When the news hit, the yen strengthened, which is exactly what Japanese officials don’t want. They’ve announced policy moves outside of scheduled meetings before. I wouldn’t be surprised if we got word of a new initiative in the next couple of weeks. Charles’ short yen position in the Boom & Bust portfolio should be a great trade in the months ahead.
Dutch Bank ABN/Ambro Announces Plan for Negative Interest on Business Accounts… The bank will revise its account documents to allow for charging large depositors.
What it means – As the era of negative rates drags on, this will become commonplace. Banks are stuck with a bad set of facts. They earn very little interest on loans, and pay central banks to hold their excess funds. Eventually, something’s got to give.
It was only a matter of time before banks passed their financial pain down the line to their clients. It will be interesting to see how businesses react. I don’t think they’ll rush to withdraw large amounts of cash because they’d have to store it. Instead, I think it’s more likely they’ll redistribute the funds in liquid accounts, perhaps buying short government bonds that they can quickly sell. This would favor bonds with positive yields… like U.S. Treasury bonds.
U.S. Crude Oil Inventory Rose 1.7m Barrels, Gasoline Inventory Increased 0.5m Barrels… Typically, inventory falls during the summer months as drivers use up supply, but this year refining has overwhelmed demand. Oil ended a seven-week stretch of declining inventory.
What it means – Frackers hate this. Higher inventory means lower prices, which is why oil fell off a cliff this week, dropping near $40 per barrel. The problem isn’t a lack of summer drivers. Americans have hit the road in record numbers.
Refiners added more capacity a couple of years ago, but this year there’s another source of gasoline on the world market – China. The Middle Kingdom recently relaxed regulations on exporting fuel, so Chinese refiners have been spilling more supply. The result is a lower price for consumers, and less revenue for oil companies. This will keep a lid on fracking activity in the U.S., which will also limit the number of jobs in the oil patch.
Next Week – The first week of August brings economic reports on manufacturing and factory orders, but the big news will be the jobs report on Friday. Overseas, the Bank of England will announce its policy decision, which could include lower rates or quantitative easing to counterbalance the economic fears over the Brexit vote.
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