Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Why the Federal Reserve Will Move U.S. Interest Rates

Interest-Rates / US Interest Rates Feb 08, 2015 - 05:29 PM GMT

By: Money_Morning

Interest-Rates

Michael E. Lewitt writes: To say that markets are confused about when the Federal Reserve is going to raise interest rates is the understatement of the year.

The confusion is understandable. While the U.S. economy no longer needs crisis-era policies like zero interest rates and quantitative easing, the rest of the world is still struggling.


While some would argue that such policies are not the answer, central banks in Europe, Japan and China are doubling down on huge bond buying programs.

The question is whether the Federal Reserve will go its own way or allow weakness abroad to govern its next move…

What Federal Reserve Officials are Saying About a Move

A number of key Federal Reserve officials have been telling investors to keep their eyes on the ball at home. Mostly recently, St. Louis Fed President James Bullard told markets that they were ignoring warnings from the Fed that it planned to raise interest rates by the middle of the year unless economic data started weakening again.

This echoes the consistent message of Fed Chair Janet Yellen as well as that of her most important deputy, New York Fed Chair William Dudley.

The key data that the Fed is focusing on is jobs data and inflation data, both of which are holding steady.

The January jobs report, which was released Friday, was one of the strongest in months and included big upward revisions in the data for November and December. And while inflation remains lower than the Fed would like, this is almost exclusively due to the sharp drop in oil prices. Overall inflation is close to the Fed's target of 2% and would quickly hit that level if oil prices were to recover or wages start to increase. Accordingly, the Fed is quickly running out of excuses to delay raising rates beyond June.

The Bond Markets Read the Fed's Signals

Last week, markets seemed to pick up on that message. While stocks boomeranged all over the place and momentarily regained all of their 2015 losses before ending slightly in the red, bonds got pummeled.

Treasuries sold off four days in a row last week, their longest losing streak since last September. The iShares 20+ Year Treasury Bond ETF (TLT) dropped by a sharp 7.32 points or 5.3% on the week to close at $130.96, its lowest close since January 5.

The two-year Treasury yield, the most sensitive to the Fed's next move, saw its biggest one day jump since 2009, closing at 0.643% and signaling concern that the Fed could move sooner rather than later. After dropping from 2.173% to 1.669% from the beginning of the year through last Monday, its lowest level since May 2013, the benchmark 10-year Treasury yield spiked back up to close the week at 1.94%.

To keep this in global perspective, however, this yield still dwarfs those on 10-year German and Japanese bonds of 0.376% and 0.345%, suggesting that U.S. Treasuries are still much more attractive than foreign bonds and are unlikely to sell off much further.

In the bond futures pits, which provide the best real-time consensus on when the Fed will raise rates, traders increased their bets on a June rate hike from 14% on Thursday to 24% on Friday. Looking out further, futures traders were placing a 63% probability of the Fed raising rates by 50 basis points by September; a week ago the odds were under 50%.

For investors who had talked themselves into thinking that the Fed might sit out 2015, it was not a good week.

How the Government Numbers Support an Increase

If we look at the January jobs report, we can see that it is time for the Fed to let go and let the economy walk on its own two feet. Actually, that has been the case for a couple of years, but central bankers tend to be slow learners and markets have become spoiled by easy money. The U.S. produced 257,000 jobs in January, 267,000 of which came in the private sector. In addition, last year's jobs gains were revised upwards by 245,000 to 3,197,000.

Remarkably, last November shows the second biggest jobs increase of the 21st century with 423,000 new jobs added. The U.S. economy has now added an average of 336,000 new jobs over the last three months, an impressive showing by any measure.

There was also a 746,000 person increase in household employment and a huge 1.05 million increase in the size of the labor force, which led to an increase in the unemployment rate to 5.7% in January as the labor participation rate rose to 62.9%, off the lowest levels of the last 40 years.

U6, a broader measure that includes underemployed and underutilized workers, ticked up to 11.3%. Even better, after a 0.2% drop in hourly earnings in December, earnings rebounded by 0.5% month-over-month in January, the largest monthly gain since November 2008. This was partly due to higher minimum wage losses that went into effect in 21 states on January 1st.

Over the December-January period, wage growth was still sluggish but if the trend holds it could put upward pressure on inflation. This report may seems odd with mass layoffs occurring throughout the energy industry, but it for the moment it appears to increase the pressure on the Fed to hike rates sooner rather than later.

Equity Markets Are Less Certain

Stocks reacted calmly to the jobs report than the bond market after a volatile week of strong gains, spending most of Friday doing very little until seeing some profit taking late in the day. Stocks enjoyed a heroic week as oil prices rose by 7% to $51.69 per barrel, completing a 13% recovery over the past two weeks.

Stocks also ignored the unfolding Greek drama as Greece threatens Europe and Europe threatens Greece. Meanwhile, nobody talks about the fact that Greece is broke and can never repay its debts or survive economically inside the European Union unless Germany pays the bills forever.

On the week, the Dow Jones Industrial Average jumped by 659 points, or 3.8% to 17,824.29. The S&P 500 gained 3%, or 61 points, to 2055.47 and is now just 3 points shy of where it started the year. The Nasdaq Composite Index rose by 109 points or 2.4% to 4744.40.

A number of widely followed companies spiced up the week's earnings reports including Twitter Inc (NYSE: TWTR), whose stock soared by more than 16% on Friday after failing for once to disappoint investor and hedge fund favorite Gilead Sciences, Inc. (Nasdaq: GILD), whose stock dropped by 9.3% in the days after announcing terrific earnings and the payment of its first dividend after disclosing some pricing pressures on its franchise hepatitis-C drug. Other stocks like Alibaba Group Holding Ltd (NYSE: BABA) ($85.68 versus a high of $120.00) and Microsoft Corporation ($42.41 versus a high of $50.05) are well off recent highs after disappointing high investor expectations.

This is an extremely demanding stock market trading at historic valuations. It is also a stock market that is ignoring the negative economic signals being emitted by the commodity and bond markets. While the S&P 500 is trading at about 16x estimates for 2015 earnings, those earnings estimates are being steadily lowered based on the drop in oil prices and the negative effect of the strong dollar on corporate results.

Other measures that I cite often, including the S&P 500 Market Cap/GDP Ratio and the Shiller Cyclically Adjusted P/E Ratio, are also at all-time highs and far above their historical norms.

What applies to expensive stocks also applies to an expensive market: there is no margin for error and earnings misses are punished with sharp sell-offs.

Whether stocks can hold onto the gains they enjoyed last week remains to be seen particularly if sentiment builds that a Fed rate hike is imminent. Investors would do well to look for opportunities to hedge their positions…

Source :http://moneymorning.com/2015/02/08/why-the-federal-reserve-will-move-rates/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules