Thanks to my friend Lance Gaitan at Dent Research, on very Friday we share the current take on what’s driving the market. We do our best to separate the media noise from the real news. Here’s the summary from Lance on December 1, 2017.
Janet Yellen, the outgoing Chair of the Federal Reserve System, testified before the U.S. Congress Joint Economic Committee for the final time on Wednesday morning, November 29, 2017.
I’ll cut to the chase: She didn’t say anything that moved markets.
She did speak, again, to the idea of “transitory” factors at play in keeping inflation low, such as the drop in cell - phone service fees. But stubbornly low inflation levels could also be blamed on more persistent factors, like the aging population.
Where have I heard that before?
Oh yeah, our own Harry Dent predicted it years ago! I’ve been a part of Dent Research for more than a decade, and Harry and Rodney spoke and wrote about the demographic effect on our economy well before I heard it for the first time. An aging population spends less (because older folks are no longer spending on their kids, etc.), and lower prices follow (deflation). In the late 1980s, these same demographic factors brought Japan’s red - hot, world - leading economy to the brink of total disaster. Now, Japan’s economy is propped up solely by central bank stimulation.
Stay tuned as Yellen leads her final monetary policy meeting in a couple weeks. I expect another 0.25% hike to the federal funds rate. Yellen also testified that she beli eves Fed guidance for three more hikes in 2018 will be appropriate. Earlier this week, Jerome Powell, President Trump’s nominee to lead the post - Yellen Fed, testified before the full Senate Committee on Banking, Housing, and Urban Affairs on his nomination. He was an easy pick for Trump since he’ll likely continue Yellen’s easy - money policies. He testified that he thinks shrinking the Fed balance sheet by $1 trillion to $2 trillion will take three or four years.
Powell also confirmed his expectation of a rate hike in a couple weeks. He didn’t say anything earth - shattering, and I expect him to get confirmed. Randall Quarles was appointed to one of the many vacancies at the Fed’s Board of Governors (BOG) to fill the slot former Vice - Chair Stanley Fisher vacated. The BOG slot is up in January, but expect him to be re - appointed to a full term. Quarles was also appointed as the Vice - Chair of Supervision and will lead the way in loosening banking regulations put in place during the 2007 - 09 financial crisis.
Finally, Marvin Goodfriend was formally nominated to the BOG yesterday. He’s a former Fed official and is currently a professor of economics at Carnegie Mellon University. Goodfriend is a conservative who has been critical of Fed policies during the crisis and after. Trump is at least moving on his Fed picks, but he still has a way to go. Even when Powell and Goodfriend are confirmed and Quarles is re - appointed, there will still be three open positions on the BOG. Even if Trump fills all current Fed openings, don’t expect much to change in the short term. Unless there’s a substantial market disruption, Fed officials and the White House will be satisfied with past and current monetary policy.
On November 30, 2017, U.S. stock markets flew to record highs on the expectations that the tax bill will pass. Markets surged after Senator John McCain backed the current version of the bill. Markets seem to dismiss all negatives, such as overvalued stocks, historically low volatility, and even the possibility of a government shutdown next month. Exuberance isn’t just limited to stocks, as Bitcoin hit a high of $11,000 per coin earlier this week!
U.S. Treasury bond markets, on the other hand, sold off a little in the last week. But volatility has fallen off a cliff. Yields on the long - term Treasury have fluctuated between 2.88% and 2.74%, closing yesterday at about 2.85%. We had two key data reports this past week. October new home sales hit a multi - year high on expectations of a drop.
Remember, new home sales have a multiplier effect on the economy because they generate related sales in appliances and furniture. October Personal Income and Outlays were out yesterday morning. Personal income rose 0.4% on expectations of a 0.3% rise. Spending was up 0.3%, in line with expectations. The Fed’s preferred inflation measure, the personal consumption expenditure (PCE) price index, was up 0.2% (excluding food and energy) on the month and 1.4% on the year, as expected.
If inflation picks up a little on increased wages and consumption, our long - term position should do well. So far, it’s been a bit of a see - saw.
Next Week’s Market Movers
The lone scheduled market mover next week will be the final jobs report of the year. The questions on everyone’s mind will be whether and how it will impact the upcoming Fed meeting. What is not scheduled is how markets may tumble following the ABC News report about former National Security Adviser Michael Flynn preparing to tell the whole truth and nothing but the truth about the direction to make contact with Russians given by President Donald Trump on Friday, December 1, 2017. With the first shoe to drop being the Flynn fallout, we may begin to discover how low we can go.
The Fed will surely be focused on the wage segment of Friday’s November employment report. Earnings have a direct impact on stubbornly low inflation, and even though the number of jobs expanded last month, wages were flat. A major disappointment in wage growth could put the brakes on an expected rate hike in a couple weeks. But remember, income was higher than expected in yesterday's Personal Income and Outlays report.
The proof is in the planning.
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