As expected, earlier this week the Fed hiked the overnight federal funds rate to 0.75%-1.0%. For whatever reason, that could include ‘Irrational Exuberance’ Part II, the markets treated the rate hike like it was a cut. Stocks moved sharply higher and Treasury yields fell, submits Lance Gaitlan, Dent Research on Friday, March 17,2017
Thanks to Dent Research, provided here is our weekly information roundup ending the week of March 17, 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 Interest Rates 0.25%… Noting strength in the economy, the central bank also forecast two more rate hikes this year.
What it means – It was like reading Orwell’s 1984, where words are distorted. The economy is so “good” that the Fed expects GDP to grow about 2% this year and next, with growth trailing off after that. Things are so awesome that the bankers forecast they will raise rates to a range of 1.25% to 1.50% by the end of this year, reaching 3% in 2020. Meanwhile outfits like the Atlanta Fed have lowered their first-quarter GDP estimates dramatically, and now expect growth under 1.0%. None of this strikes me as an economy that needs taming. Instead, I think the Fed is desperate to get interest rates higher before the next downturn so they have room to lower rates.
It was notable that the markets, both stocks and bonds, reacted favorably. That’s because, even though the Fed spread sunshine and light with its words, they still outlined a very slow pace for raising rates.
Bank Loans Grow at Slowest Pace Since 2014… The weakness was more pronounced in business loans, which ticked up by 3.9%.
What it means – If the economy is so good and rates are too low, then why aren’t businesses and consumers taking out all the debt they can? It can’t be that rates are too high, so it must be that economic growth is… nah! Seriously, though, the pace of bank lending highlights the structural issue that the Fed can’t fix. We don’t have a money supply issue, meaning too much. Instead, we have a money demand issue.
Companies borrow what they believe to be right for the level of business they have and expect in the future. Apart from student loans, consumers are borrowing at a level that matches their age and stage of life. Both are more modest that what we had earlier in the economic cycle.
Feeling better about the economy and spending more money are two very different things.
Retail Sales Up 0.1% in February, Up 0.2% Excluding Autos… The growth rate matched modest expectations after a strong January.
What it means – Well, the consumer isn’t rushing out to buy a lot more stuff. Autos make up 20% of retail sales, and car makers have a lot of inventory sitting on their lots, even though they’re offering incentives not seen since the mid-2000s. The numbers just confirm what we’ve been saying for years. Weak economic growth is based on slack demand. While there are ebbs and flows in the rate of growth, it remains modest over time.
Consumer Prices Inched Up 0.1% in February, and are 2.7% Higher for the Year… Excluding food and energy, prices rose 0.2% last month and are 2.2% ahead of last year.
What it means – Energy prices are 15% higher than February 2016, and gasoline prices are 30% higher, which explains why the overall number looks out of whack at almost 3%. But without that volatile component, prices are still more than 2% above where they were last year, and it doesn’t take a lot of research to figure out why. Housing costs are 3.2% higher than this time last year, and medical care costs are up 3.5%.
Stagflation, here we come.
Housing Starts Rose Slightly in February, with Single-Family Starts Up 3.2% Over Last Year and Multifamily Starts Up 13%... Single-family permits rose 13.5% over last year, while multi-family permits fell 11.2% over last year.
What it means – Home builders are adding supply to the markets at a slow, but steady pace. But that might change in the months ahead. Currently, there are 1.091 million homes under construction, the highest number since October 2007. With slightly higher mortgage rates and more inventory, it’s possible that home prices will soften this summer, especially if Yellen & Company make good on another rate hike in June and the economy remains soft.
Puerto Rico Oversight Board Approves Lower Growth Forecast, Puts Creditors on Notice... To gain approval, the Puerto Rican government lowered its economic forecast and cut the funds available to bondholders by a third.
What it means – This is when the fight starts! Puerto Rico is broke. The commonwealth carries more than $70 billion in debt and has a cool $4 billion set aside to pay pension liabilities of $40 billion. There is no math that makes this work. And yet, its constitution clearly states that bonds will be repaid before any other expense – before salaries, pensions, operating expenses, etc.
Of course, this is ignored. The governor appealed to the U.S. Congress for a way out. He got an oversight board and a pause on litigation. Well, now we know that bondholders will take an even bigger hit than originally expected, and the legal stay will end on May 1.
While the oversight board’s numbers might be correct, it won’t ease the financial pain, or change the fact that the Puerto Rican government and the U.S. government are trampling on the constitutional rights of the bondholders. While Puerto Rico might sound like its far away, what happens to its bondholders is just a legal decision away from places like Illinois, Chicago, and other jurisdictions where debts are exploding out of control. Bondholders beware.
Venezuelan Government Seizes Two Bakeries, Arrests Four Bakers… The government claims the bakers were making illegal goods like sweet rolls and croissants.
What it means – In what was recently the richest country in Latin America, nearly 50% of the population now lives in poverty. Socialism seems to have brought about the equality that Chavez and his successor Maduro demanded. Too bad that it happened by dragging everyone down. As for the bakers, they were simply the latest victims of a government in search of a scapegoat. This is the same government that ran the Venezuelan oil giant into the ground and has siphoned off billions of dollars for the bank accounts of corrupt leaders.
Next Week – The week of March 20 brings reports on new home sales, existing home sales, durable goods orders.
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