Federal Reserve Raises Rates by 0.25%, Expects to Raise Rates Two More Times This Year… Noting strength in the economy, low unemployment, and moderate prices, the bankers felt confident enough to both raise rates and forecast two more rate hikes in 2018.
What it means – New Fed Chair Powell issued a brief statement and then conducted a press conference where he reiterated the committee’s positive outlook. But there’s less here than what meets the eye. At the March meeting, the committee forecast only three rate hikes in 2018, now they expect four. The difference is a single vote. In March seven of 15 voting members expected four rate hikes this year. At Wednesday’s meeting, eight members signaled four hikes. The changed vote of one member out of 15 isn’t nearly as convincing of a story. If the economy eases in the second half of the year, the number of committee members voting for more hikes could easily slip.
Another interesting note is the committee’s GDP forecast. The Fed’s annual forecast for 2018 is 2.8%, even though first-quarter GDP came in at 2.3% and forecasts second-quarter GDP to grow by 4.8%. To get a year of growth at 2.8%, the GDP growth in the second-half of this year would have to average about 2.1%. That’s not a very exciting number.
The Fed also expects GDP growth of 2.4% next year, 2.0% in 2020, and long-run growth just under 2%. If the Fed is right on GDP (which is doubtful, since the central bank has been overly optimistic for years), then don’t expect short-term rates to shoot higher anytime soon. We remain on the path of plodding, modest growth, even though we get shocks to the system, like tax reform, from time to time.
Consumer Prices Up 0.2% in May, Up 2.8% Over Last Year… Excluding food and energy, prices rose 0.2% last month and are 2.2% higher than last year.
What it means – Oil and gas pushed up overall inflation, while home prices, which account for about one-third of consumer spending, expanded by 0.3%. New car prices also rose 0.3%, but used car prices dipped as more units came off leases and entered the market.
The overall reading gave the Fed room to raise interest rates. One interesting note: airfares dropped 1.9%. That’s surprising given that oil prices are 45% higher than this time last year. If the economy grows at a moderate pace, airfares should reverse course and move higher.
Retail Sales Rose 0.8% in May, Up 0.9% Excluding Autos… Sales easily beat the growth forecast of 0.4%. Sales excluding autos and gas matched the overall gains at 0.8%.
What it means – Consumers are getting their mojo back. After a lackluster end to winter and spring, it looks like consumers are opening their pocketbooks, driving spending at restaurants, department stores, and even home improvement stores.
The numbers bode well for a solid second-quarter GDP report next month, which is part of the reason that the Atlanta Fed GDPNow model forecasts GDP growth of 4.8%. There’s no doubt consumers are out in force for now.
Industrial Production Dropped 0.1% in May… Missing the forecast of a modest 0.1% gain, production dipped last month, dragged lower by auto manufacturing.
What it means – Motor vehicle production fell 6.5% last month after a fire at a supplier stopped production of such vehicles as the Ford F-150. But that only masked the weakness in other manufacturing areas, which fell even after excluding autos. Even the production of business equipment slipped 1.1%. Mining, which includes oil and gas production, was a bright spot, up 1.8% last month and up 12.6% over last year.
Overall, this report screams moderation. Even though consumers look like they’re spending a bit more, manufacturing, mining, and utilities are still plodding along at a very modest pace.
European Industrial Production Down 0.9% in April… Industrial production has fallen four times since November. Workday growth has slowed from 3.2% in January to a modest 1.7%.
What it means – Easing industrial production is the latest signal that the European growth engine is slowing down. This will put a dent in the euro as investors take out their cash and look for stronger markets. European Central Bank (ECB) President Mario Draghi should be concerned. The aging populations of Europe will keep growth in check for many years to come, and there isn’t much the central bank can do to change that.
ECB Holds Rates Steady at Negative 0.40%, Keeps Bond Buying in Place, But Lays Out End of Program… The ECB kept everything the same Thursday, but reported that it will lower its bond purchases from $30 billion per month to $15 billion in September, and end the bond buying in December. In addition, the bank will hold rates at current levels at least until the summer of 2019.
What it means – The ECB is throwing in the towel. The economic bloc can’t sustain meaningful economic growth, which would call for more central bank intervention, but the Fed is raising rates, which drains capital, and the bankers can’t find enough bonds to buy.
Even though the ECB expects European GDP to grow at a meager 2.1% this year and 1.9% and 1.7% in 2019 and 2020, respectively, the other concerns are weighing on the central bank. There’s also the pesky fact that their intervention isn’t working. When you pump $30 billion into the economy every month and hold deposit rates at minus 0.40%, you expect at least decent GDP growth. That’s not happening.
The populations of the countries in the economic bloc are older, and the countries are struggling with their individual economic challenges. The dream of the euro is fading, not strengthening.
Bitcoin and Other Cryptocurrencies Fall on Reports of Manipulation… Researchers from the University of Texas believe much of the cryptocurrency explosion in 2017 was due to price manipulation at one exchange, Bitfinex.
What it means – Bitfinex is among the largest cryptocurrency exchanges in the world. It’s also largely unregulated. The exchange issues its own currency, tether, which is supposed to be connected to the U.S. dollar. Researchers believe that when Bitcoin and other cryptocurrencies dipped in 2017, Bitfinex would quickly issue more tether, which would be used to buy the other cryptos, driving prices higher. The researchers are well regarded in the financial sector, which makes the critique all the more damning.
Cryptocurrency advocates were thrilled over the past year as institutional investors announced they were joining the bitcoin party. Those same large investors might be less enthusiastic if they believe a lot of the froth came from illegal activity. Bitcoin is down more than 60% from its high in 2017.
St. Louis University Will Pay $3,500 to Expose You to Influenza… The University’s Center for Vaccine Development is testing how the flu spreads.
What it means – Earn four figures, stay in a residence-style hotel, gorge on TV and the internet… what could be better? Oh yeah, researchers will give you a placebo or vaccine, eventually expose you to influenza, and then monitor how you respond. I’m not sure it’s worth the hassle, but at least the rooms in the hotel have great views of the St. Louis Arch.
Data supplied by Dent Research/Delray Beach Publishing
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