Equities hit new all-time highs at the beginning of the week, but they
floundered by the end of the week. Since the economic data has been mixed,
the Fed’s been in a quandary. According to the Fed minutes, some
officials leaned toward a rate hike now while others worried about low
inflation and wanted to wait. In the end, all agreed to hold a rate hike
off for now.
Remember when the ‘data driven’ Fed tried to convince the markets that they might raise rates four times this year? So much for that theory.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on August 19, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
U.S. Consumer Prices Flat in July, Up 0.8% Year-Over-Year… Core inflation inched higher by 0.1%, and stands 2.2% higher than July
of last year.
What it means – Core inflation has remained above the Fed’s 2% threshold for months, which could give the central bankers the confidence to raise interest rates. But the devil is always in the details.
Energy and food prices slipped a bit last month, while medical costs and housing pushed higher. Medical care prices increased 0.5%, and are up 4.0% over last year. Housing prices are 2.4% higher than last year. It’s easy to see how higher interest rates might curb housing inflation by making mortgages less affordable, but rising medical costs are a demographic issue that will haunt our economy for decades.
There’s nothing in this report that gives a clear indication of what the Fed will do next. Watch for any movement to consumer prices, which is driven by consumer spending. If spending declines, prices will follow.
Housing Starts Up 2.1% in July, Permits Flat… Single-family housing starts rose 0.5%; multifamily units jumped 5.0%.
What it means – Housing remains steady, but there is a worrying trend in permits. Since April, the number of permits issued has lagged behind the number of housing starts, which is unusual.
There can be a long delay between the time a permit’s granted and when the builder finally breaks ground. Some permitted jobs are never built. So when there are fewer permits issued than homes under construction, it implies falling construction in the months ahead.
Homebuilding, which never fully recovered after the financial crisis, could turn lower later this year or in early 2017.
U.S. Industrial Production Rose 0.7% in July… Driven by strong gains in utilities and manufacturing, industrial production posted solid gains in June and July.
What it means – High temperatures pushed up electricity demand across much of the nation last month, while auto sales were also strong. But neither of those trends are likely to continue. The summer will (eventually) give way to fall, and as Ford Motor Company told us, auto sales are ripe for a setback. Expect industrial production to fade in the months ahead.
Capacity utilization jumped from 75.4% to 75.9%. That’s great news, but it’s still low. This measure typically runs at or above 80% during an economic expansion. The fact that we’re stuck in the mid-70s points to continued economic weakness.
Atlanta GDPNow Forecasts Third-Quarter GDP to Grow 3.6%... This is a slight uptick from the recent low of 3.5%, but is still less than the starting forecast of 3.8%.
What it means – 3.6% GDP growth this quarter would be awesome, but not a game-changer. Remember, first-quarter GDP grew a measly 0.8%, and second-quarter GDP barely beat that at 1.2%. If third-quarter growth comes in as expected, the average for the year would be 1.9%, which is pathetic.
To get GDP growth above 2% for the year, the economy must expand by an average of 3% in the third and fourth quarter. To get growth above 2.5% (which is still an ugly reading), growth would have to average 4% for the next two quarters. There’s almost no chance of that happening.
Fed Minutes from July Meeting Reveal Little… The minutes of the meeting showed varied opinions among the governors. Several wanted to hold rates steady, some wanted to raise rates, and a few wanted more data but leaned toward higher rates.
What it means – The Fed is trying to play the world, and it isn’t working. For almost a year we’ve been in the same pattern. The governors telegraphed a hike last December, and then announced that rates would move up at a measured pace for the next several years. Their own “dot plot” targets showed that the group expected to raise rates three or four times in 2016. But they haven’t. Economic growth in the U.S. and around the world hasn’t materialized (as noted above in U.S. GDP growth). So the central bankers sat on the sidelines… for the most part.
They keep trying to raise long interest rates with their words, bending the yield curve to their will by talking up rates. Think about the many speeches by Fed officials this year that included mentions of economic stability, and that it’s finally time to think about higher rates. In addition, the Fed’s unofficial spokesman in the press, Jon Hilsenrath, has written several times on the desire of Fed officials to push up rates. And yet, here we are, staring down September and not a single rate increase in 2016.
I think the Fed will raise rates one time this year, but it will be more about saving face that pursuing thoughtful monetary policy.
Vancouver Home Prices Down 20%... After the government imposed a 15% tax on foreign home purchases on July 25, foreign buyers fled the market.
What it means – Many Chinese investors trying to get cash out of their country chose Vancouver as their destination. The first item on their shopping list was a big house, which drove home prices to dizzying heights. The new tax took some froth out of the markets, with the number of home sales in Greater Vancouver for the first two weeks of August down 85% compared with the same period last year. While prices dropped 20%, the average detached home still sells for $2.6 million, not exactly a bargain price yet. We’ll see if this turns into a housing rout, or is just a temporary setback.
Next Week – The week of August 22 includes reports on new home sales, existing home sales, durable goods, and the Bureau of Economic Analysis will release its second estimate of second-quarter GDP.
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