Tech stocks made new record highs last week until the bottom fell out on Friday, June 16, 2017. Since last week, the Nasdaq slipped about 2.5%. The S&P 500 and the Dow pulled back a bit, but still sit just below record levels. The real market movement came from the Treasury market. Yes, the Fed delivered on its promised quarter-point rate hike Wednesday. But, even ahead of the announcement, yields moved sharply lower in response to disappointing retail sales and consumer inflation data.
The flattening yield curve shows the market doesn’t believe the Fed’s assumption that the economy will rebound because of the strong jobs market. We’ll see if the Fed or the Treasury market has the correct market outlook. Stay tuned…
Thanks to Dent Research, provided here is our weekly information roundup ending the week of June 16, 2017. 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.
The Federal Reserve Raised Short-Term Rates 0.25% and Outlined How It Will Shrink its Balance Sheet... In spite of disappointing inflation and sales data, the central bank announced tighter monetary policy as it moves toward a more normal stance.
What it means – We’ll see. Yes, the Fed raised rates, as widely expected, and they laid out how they would let reserves shrink as bonds mature. But they left the door open as to when. There’s an old piece of wisdom in forecasting – give a level or a date, but never both. We’ve now got the level, or procedure, we just don’t know when. Fed Chair Yellen told reporters “relatively soon,” whatever that means. She also, as usual, reported that the Fed is data driven, so if anything changes, then the pace of change on the balance sheet and interest rate hikes will change. Does that include softer-than-expected inflation and disappointing retail sales? Because as I outline below, we’ve got both.
The markets weren’t sure what to do with the news. Stocks were mixed before selling off on Thursday, and interest rates, which should go higher, dipped lower. It’s safe to say that we’ve never printed trillions of dollars out of thin air before, so no one knows how stuffing that genie back in the bottle will affect the markets.
For all the Fed watching and hand-wringing, it’s worth remembering where we are. Inflation clocked in at 1.9% on the headline number and 1.7% for core prices. With short-term rates now at 1.00% to 1.25%, or an average of 1.125%, they’re still at least 0.47% below inflation. Nine years after the financial crisis, savers still face negative rates because they lose more purchasing power to inflation than they earn on deposits. That’s a bad deal.
Consumer Prices Drifted Lower in May… The consumer price index fell 0.1% last month, while core prices, excluding food and energy, were up 0.1%. For the year, headline and core prices rose 1.9% and 1.7%, respectively.
What it means – Home prices, electronics, transportation, and energy all dragged on prices. It appears that weak wage growth is keeping a lid on inflation, and finally bending the curve in real estate.
No matter how hard the Fed and others try, they can’t escape the powerful force of demographics, which includes an aging generation that votes with its pocketbook. Sellers don’t have much pricing power, and productivity growth is slow. This should last for several more years.
Retail Sales Dip 0.3% in May… Echoing consumer prices, retail sales came in much weaker than expected, with falling numbers across many categories.
What it means – Excluding autos, retail sales still fell 0.3%. Department store sales dipped 1%, restaurants 0.1%, gasoline stations 2.4%, and electronics 2.8%. Yet again, GDP forecasters will be working their erasers overtime, lowering projections for the second quarter.
Like consumer prices, uninspiring retail sales are a symptom of what’s ailing the nation – weak wage growth and an aging population. Until the next generation ramps up its spending, these trends will remain firmly in place.
Without higher wages, millennials would have to take on a lot of debt to jumpstart the economy. There are some early signs that this might be happening, such as a higher percentage of first-time home buyers in 2016. But as retail sales and consumer prices show, we need much greater participation to put the U.S. economy on track for stronger growth.
U.S. Shale Oil Production Expected to Reach Record Output in July… The Energy Information Agency forecasts shale production to reach 5.475 barrels per day next month, eclipsing the old record of 5.46 barrels per day set in March 2015.
What it means – I’m certain that shale producers would like to channel Elvis Presley and tell OPEC, “Thank you, thank you very much.” As I and many others expected, the production cuts by OPEC and its non-member confederates drove oil prices high enough to bring the U.S. shale producers back en masse. The result is as expected… lower oil prices. Except this time, OPEC and its band of merry men have less market share. If prices stick below $50, things will get rough for countries that bank on oil revenue to balance their budgets.
The ugly situation in Venezuela will get worse, Russia will have to part with some of its modest foreign currency reserves, and the oil producers of the Middle East will have to cut back on social largesse. It couldn’t happen to a nicer group. Meanwhile, energy sector employment in the U.S. will tick higher. Maybe we should all send OPEC a thank you note.
GM Will Extend Summer Shutdown Due to Slumping Sales… The automaker has nearly one million vehicles sitting on dealer lots, according to Wardsauto.com.
What it means – This is what I expected a couple of weeks ago when the industry reported weaker sales in May. The car maker, which typically shuts down for retooling in the summer, will keep the doors closed a bit longer, and perhaps slow down the production lines when they reopen. This will drive down employment numbers and GDP.
The reasons for the slump are big, ugly, and getting worse. As car dealers extended the terms of loans, car buyers built up less equity before they traded in their vehicles. This meant more negative equity was rolled into new loans, which were made for even longer terms, amplifying the issue. As the industry slows down and more vehicles come off lease, used vehicles are flooding a depressed market, driving down used car values. This makes the bad situation even worse.
And we haven’t scratched the surface of defaults on auto loans. As consumers fail to pay, bondholders that reached for yield and bought low-rated car loan debt will suffer losses. But these aren’t mom-and-pop investors, they tend to be big dogs… like pension funds. You can see where this is going, and it’s not good.
U.S. Industrial Production Flat in May… Reflecting weakness in manufacturing and growth in mining, the overall report was below the estimate of 0.2%.
What it means – Production highlights two trends noted above. Auto manufacturing dipped 2% last month in response to slower sales. However, mining (which includes oil and gas exploration and recovery) jumped 1.6%. Unfortunately, there are a lot more Americans working in manufacturing than mining.
As GM and others take a break this summer, production will fall along with GDP growth and employment.
Pennsylvania Votes to Move New State Employees to 401k-Style Plans… The move, to take place starting in 2019, will stop the state’s pension problem from getting worse.
What it means – This is great news, because it shows that state legislatures are finally taking the pension issue seriously. Pennsylvania joins Texas in addressing some of the most pressing problems, but the Keystone State’s solution doesn’t fix the entire mess. While moving new employees to 401k plans will help with future liabilities, it doesn’t do anything to close the underfunding gap that already exists for current workers and retirees. But at least they’re trying. Illinois, Kentucky, and New Jersey should pay close attention.
Thief Climbed Through Russian Central Bank Window, Stole 11 million Rubles… In addition to currency, the thief also rummaged through the personal property of employees. So far, no one has been apprehended.
What it means – I guess the Bank of Russia offices are less secure than the average suburban home in America. I’ve got a suggestion. Call ADT. They can install a security system that works on doors AND windows for $99. They’ll even monitor the system for a few bucks a month. Or, just buy an internet camera and install it yourself.
But this really begs a bigger question. Why wasn’t the cash, worth almost $200,000, locked in a vault or some other secure location? It’s one of those things that make you go, Hmm.
Next Week – The week of June 19 includes reports on existing home sales and new home sales.
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