Crossing Wall Street Review – May 5, 2017
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (NYSE Arca: CWS)
The Fed Should Not Raise Rates in June
So far, the Federal Reserve has raised interest rates three times this cycle: this past March, this past December and again in the December prior to that. The current range for the Federal funds rate is 0.75% to 1%. Obviously, that’s quite low, and it continues to be below inflation.
The Federal Reserve got together again this week on Tuesday and Wednesday. Wall Street was almost certain that the central bank would forego a rate increase this month, and they were right on that.
But in the Fed’s policy statement, the central bank dropped several hints that a rate hike is on the way. I had no objections to the Fed’s first three rate increases, but I just don’t see the need for another. At least, not yet. Let’s remember that the jobs report for March was pretty much a dud. Just 98,000 net new jobs. And what about inflation? Please. The last core CPI report was the weakest in 35 years. We actually had a bit of de-flation.
I could go on. The first-quarter GDP report fell flat on its face. We had growth of just 0.7%, the slowest in three years. We also learned this week that worker productivity fell by 0.6% during Q1. For some context, the long-run average is 2.1%. The latest construction-spending report showed a decline of 0.2% for March.
Check out the commodity pits. You may also have noticed that oil is falling again. West Texas Crude closed Thursday at $45.52 per barrel. That’s the lowest close for the year. Oil was over $53 just a few weeks ago. I don’t know if the trend will continue, but it’s hard to say that inflation is heating up when oil is going down fast. Still, the bond market is getting ready for higher rates. The short end of the bond market is seeing the highest yields in more than eight years.
To be fair, there’s been some decent news on the jobs front. Initial jobless claims have been under 300,000 for 114 weeks in a row. That’ the longest such streak since 1970. Job growth has been steady, but the problem is that wage growth has been, at best, tepid.
The latest numbers from the futures market show that traders believe there’s a 76% chance that the Fed will raise rates again in June. On top of that, there’s a 51% chance of another rate hike in December.
In the Fed’s policy statement, they acknowledged the recent weakness, “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.” It’s as if they’re saying, “Here are the reasons not to raise rates. But we’re going to anyway.”
We can also see some interesting trends when we look at the stock market. While the overall market has been calm, we’ve been seeing a growing divergence just below the surface. Growth stocks are going higher, while value stocks are mostly going nowhere.
Some of the mega cap tech stocks are up 20-30% this year while the S&P 500 is up 6.7%. Take away a few high-profile names, and the market is basically flat.