Bottom line, some committee members believed the data supported a rate hike. In fact, some “judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.” On the other hand, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labor market and whether inflation was continuing to rise gradually to 2 percent as expected.” And, several suggested that the Committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis.” The bolds are mine.
Let’s be honest, this is the same noncommittal committee that we’ve seen for years. A committee that missed their chance to hike years ago but now so desperately wants to prove the validity of their 7 year strategy with more rate hikes. Their credibility is certainly at all time lows. The markets won’t believe another rate hike until they see another rate hike. That much is clear.
Below are some quotes from the minutes that I pulled. I’ve included commentary that points to FOR a rate hike and those that are AGAINST it. I’ll also repeat something I said a while ago. The FOMC is waiting for a perfect world to raise rates in that will never exist. Life and business will always be uncertain. This childish game of maybe/maybe not in nearly the 8th year of this recovery is an utter embarrassment.
“Regarding the near-term outlook, participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the June meeting. Brexit now appeared likely to have little effect on the U.S. economic outlook in the near term. Moreover, the employment report for June, along with other recent information that suggested that real GDP rose at a moderate rate in the second quarter, provided some reassurance that a sharp slowdown in employment and economic activity was not under way. Participants judged that the incoming information, on the whole, had lowered the downside risks to the near-term economic outlook.”
“Regarding the outlook for inflation, incoming information appeared to be broadly in line with most participants’ earlier expectations that inflation would gradually rise to 2 percent over the medium term.”
But, “Although the near-term risks to the outlook associated with Brexit had diminished over the intermeeting period, participants generally agreed that they should continue to closely monitor economic and financial developments abroad. As a consequence of Brexit, economic growth in the United Kingdom and, to a lesser extent, in the euro area would likely be slower than previously anticipated.”
“In addition to the situation in Europe, some participants continued to see a number of other downside risks to the medium-term economic and financial outlook from abroad, including weakness in the global economy more broadly, uncertainty about the outlook for China’s foreign exchange policy, and the implications of China’s run-up in debt to support its economy.”
“However, other participants expressed greater uncertainty about the trajectory of inflation. They saw little evidence that inflation was responding much to higher levels of resource utilization and suggested that the natural rate of unemployment, and the responsiveness of inflation to labor market conditions, may be lower than most current estimates. Several viewed the risks to their inflation forecasts as weighted to the downside, particularly in light of the still-low level of measures of longer-run inflation expectations and inflation compensation and the likelihood that disinflationary pressures from abroad would persist.”
In other news, quietly but within my close focus on sovereign bond yields, Portuguese bond yields have spiked over the past two days. The 10 yr yield in particular is higher by 25 bps from Friday to a 3 week high. DBRS is the only major credit rating firm that still has it investment grade as S&P, Moody’s and Fitch have them as junk. DBRS in coming months will decide whether to downgrade them or not in their review. If a downgrade happens to junk, Portugal will no longer be a beneficiary of the ECB QE bond buying. Yields are modestly higher in Italy and Spain and the German 10 yr bund yield is the least negative in 3 weeks. The 10 yr JGB yield was higher by 1.5 bps to -.07%. The US 10 yield at 1.58 is also quietly just a few bps from the highest level in almost 2 months. The US 2 yr yield at .75-.76% is at the highest level since June 23rd, the day of the UK vote and is just 2 bps from that day’s closing yield.
One of the consequences in the recent uptick in interest rates is the selloff in utility stocks and a reminder again that TOTAL RETURN equals the dividend yield PLUS a capital gain (or loss). I state the obvious because so many have been sucked in to thinking that its only the dividend yield that matters in a world of collapsing interest rates but are no longer collapsing. If one bought XLU, the utility ETF on July 6th because that 3% dividend yield at the time was so compelling, well they just lost 6.5% in capital loss since.
Stock market sentiment reached the “danger level” according to II. Bulls rose 1.9 pts to 56.2 from 54.3 last week while Bears fell .9 pts to 20. That bear level is a one year low while the Bulls are at the highest since April 2015. The Bull/Bear spread is the biggest since June 2015. So we have extreme bullish stock market sentiment (it’s not the most hated market), markets just off record highs, interest rates that are moving higher, falling earnings estimate for Q3 and we are entering September/October. Interesting times.
In the UK we got a mix of pre and post UK employment data. With the pre, the unemployment rate for the 3 months ended June held at 4.9% as expected, holding at the lowest since 2005 while more jobs than forecasted were created. On the wage side thru June, weekly earnings ex bonus’ rose 2.3% y/o/y as expected and up from 2.2% in May. That matches the most since September. With the post vote data, July jobless claims FELL 8.6k instead of rising by 9k. That’s the first decline since February. Did Carney panic too soon? The pound is lower after yesterday’s jump as the dollar is up against most currencies after yesterday’s weakness.
Continuing the lumpy pace of mortgage applications, purchases fell 3.9% w/o/w and is down for the 4th week in the past 5 and is at the lowest level since February. What’s going on? I’m not exactly sure. They are still up though 10% y/o/y. Refi applications were down 4.2% w/o/w but still are up almost 50% y/o/y with rates as low as they are.
With my other focus being retail and the US consumer, here are some quotes from the earnings releases from Target, Urban Outfitters and Lowe’s. Here’s Target:
“…the challenges we are facing in a difficult retail environment…we are planning for a challenging environment in the back half of the year.”
They of course also have to compete against AMZN and WMT. Urban’s comment doesn’t tell us anything about the consumer and their upside surprise seems to be due to their own good execution:
“These results were driven by a positive retail segment comp and substantial improvement in merchandise margins.”
Lowe’s missed both revenue and eps estimates but said:
“We believe we are well positioned to capitalize on a favorable macroeconomic backdrop for home improvement in the 2nd half of this year…”
Bottom line, consumer spending behavior remains uneven but the online trend is obvious.