US Market: Week In Review For July 2-6
Hale Stewart | Jul 09, 2018 12:06AM ET
The labor market is in strong shape; the economy is probably at "full employment."
The PCE price index is finally at/near 2%.
The Fed views the current economic situation positively, which means further gradual rate hikes are baked into the cake.
This week's big news was the release of the latest Minutes. To frame the discussion, let's look at the current employment and price situation to see where we are regarding the Fed's dual mandate (maximum employment and price stability).
The above graph is from the Atlanta Federal Reserve, and it plots a variety of current labor market indicators (in gold) relative to the highs from the last expansion (in gold). Most current conditions are at higher levels, save for wage growth. For a further discussion of the latest employment report, please see this week's Turning Points article .
As for prices, here is a chart of the Y/Y percentage change in the PCE price index:
Both overall and core are rising; the overall index is above the Fed's symmetrical 2% level, while the core rate is just below that level.
The Fed's general analysis of the economy was strong. However, it noted a few interesting weak points:
Residential investment appeared to be declining further in the second quarter after decreasing in the first quarter. Starts for new single-family homes were unchanged in April from their first-quarter average, but starts of multifamily units declined noticeably. Sales of both new and existing homes decreased in April.
These charts put that comment into context:
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The top chart shows real residential fixed investment from the BEA's GDP report. The bottom chart is the same data on a Y/Y basis.
Next up is the elevated Ted Spread:
Over the intermeeting period, short-term funding markets stayed generally stable despite still-elevated spreads between rates on some private money market instruments and OIS rates of similar maturity. While some of the factors contributing to pressures in short-term funding markets had eased recently, the three-month spread between the London interbank offered rate and the OIS rate remained significantly wider than at the start of the year.
The Ted spread measures the difference between the short-term US market and LIBOR. The level is currently elevated:
This isn't fatal, largely because other measures of short-term funding have come in (I'm thinking specifically of the commercial paper market). However, it's something to keep out eyes on.
There is growing concern among business contacts about the trade situation and its impact on business investment decisions:
However, many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.
The anecdotal comments to this week's ISM manufacturing and service sector reports had similar observations.
But regardless of these issues, the Fed views the current situation favorably:
Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on balance, in their assessments of the economic outlook. Incoming data suggested that GDP growth strengthened in the second quarter of this year, as growth of consumer spending picked up after slowing earlier in the year. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included a strong labor market, stimulative federal tax and spending policies, accommodative financial conditions, and continued high levels of household and business confidence. They also generally expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook as roughly balanced.
As a result, we can expect further modest rate increases:
Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook remained roughly balanced.
The conclusion shouldn't surprise anyone who's been paying attention.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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