As I said yesterday, I expected nothing new from the FOMC minutes as we heard from Yellen and other Fed members since the last meeting and nothing new is what we got. The FOMC continues to suffer from monetary constipation where this constant hemming and hawing over a rate hike won’t stop even in the face of a world that clearly changed on November 8th and as we approach the 8th year of this expansion. They can’t stop day trading the economic data which creates this short term obsession over when to raise instead of having a longer term vision. Yes, we got “fairly soon” on when they might hike but that then forces the market to wonder does that mean. Is it March, May or June. It seemed to me that beginning last Tuesday, Yellen warned the market that March was a growing possibility and the minutes confirmed that but rate hike odds have gone from 30% before she spoke to just 34% today. Barely a whisper.
I have one last comment on this and its with regards to the wealth effect. The concept invented by Alan Greenspan, and carried on by Mr. Bernanke and Mrs. Yellen and the unspoken 3rd mandate of the Fed. Well Fed, you certainly got what you wanted in terms of a dramatic rise in asset prices over the past 8 years (just look at the value of equities relative to the underlying US economy) but a wealth effect did not happen if the pace of personal spending in this expansion is any indication. For many, it’s the wages they earn and the savings they keep that drive spending decisions, not the value of their stock portfolios.
On the tax policy that we are all waiting for, I’m sure all you heard the new Secretary Treasury on CNBC tell us he hopes to have something done by the August recess. He sort of skipped around the border adjustment tax issue which we know is a key component of The Better Way Ryan plan and the important aspect of it is highly dependent on a sharp rally in the US dollar. The dollar index is down as of this writing and its direction from here as we get closer to hearing the tax details will be a daily market vote on whether they think BAT gets passed as part of the final bill. Gold is also at a 3 month high.
Bottom line to my comments above, the battle lines are being drawn between the hoped for tailwind of fiscal reform and the inevitable headwind of monetary policy.
Initial jobless claims totaled 244k, 4k more than expected and up from 238k last week. As a 260k print fell out of the 4 week average, it fell to 241k, the lowest since 1973 from 245k. Continuing claims, delayed by a week fell by 17k. Bottom line, employers are optimistically awaiting fiscal reform and that combined with the difficulty of finding competent employees is why there continues to be a modest pace of firing’s. For at least some sectors, imagine the difficulty in finding new workers from here if a new approach to immigration leads to an even smaller available pool to choose from.
After the upside seen in yesterday’s German IFO business confidence index, French confidence was unchanged at 104 in February as expected. That’s 1 pt though from matching its best level since 2011. We know politics will be dominating the headlines in coming months in France but at least for now we continue see an improvement in the French economic stats. The French 10 yr yield is back below 1%, down by 4.5 bps as the whole region is seeing a bid in sovereign bonds.