Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2022 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