Crossing Wall Street Review – December 1, 2017
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
The Recent Economic News Has Been…Not Bad
I like to joke that nothing upsets some people as much as good economic news. Yet it’s true: the sky is not always falling. Over the past few days, we’ve gotten some encouraging economic news.
Let’s start with the GDP report. The government revised higher its estimates for Q3 GDP growth. They now say the economy grew in real terms by 3.3% last quarter. This comes on the heels of 3.1% growth in Q2.
During this recovery, the economy has had a hard time stringing together more than three quarters in a row of robust growth. Q4 might do it for us. The Atlanta Fed currently expects Q4 growth to come in at 3.4%.
On Monday, the existing-home sales report came out, and it was the best in ten years. Then on Tuesday, the Conference Board reported that consumer confidence is at a 17-year high. (My preference is to report consumer humility as being at a 17-year low.)
Next Friday, we’ll get the jobs report for November, and I expect to see more job growth. The unemployment rate is currently at 4.1%, and it could drop below 4% for the first time since 2000.
The Federal Reserve will be getting together again on December 12-13. This will be one of their two-day meetings, which will be followed by a press conference by Janet Yellen. This will be her final presser before Jay Powell takes over early next year. The Fed will also update its economic projections, also known as the blue dots for the scatterplots.
The Fed seems almost certain to raise rates at this meeting. The futures market had it pegged at 100%, which is pretty darn certain. As I’ve said before, I think this would be a mistake, but I can’t say it’s a gigantic mistake.
After December, the outlook gets a little muddy. The futures market expects another rate hike in March, but that’s by a close margin. A hike by June is seen as much more probable (81%). That would be followed by another hike by September (55.7%).
My fear is that the Fed is moving too fast too soon. There’s very little evidence of inflation. I’m also concerned that long-term bond yields are still rather low. To me, this suggests the Fed has a lower “ceiling” for rate hikes than it may realize. I want to be clear that this isn’t a problem yet, but it could be one in the coming months.
The spread between the 2- and 10-year Treasuries recently dropped as low as 58 basis points. That means the yield curve could invert with just a few more rate hikes. I just don’t see the need for that.