Saturday, May 21, 2016

Weekly MAD Economic Review

The markets had a lot of fun this week. Much of it due to the Fed releasing their April meeting minutes. However there were also a lot of economic reports released this week.

Housing starts came in stronger than the previous month which is a good sign as spring is in full gear. What's crazy to see is how low the number actually is from a historical perspective. From the chart we can see the large volatility in the numbers. I always found it noteworthy the housing craze during the 2000's never saw a break past historical highs.  Stronger housing starts are good for the economy as it entails plenty of labor and materials(think sales at building supply stores). With the Fed raising rates(we'll get to that soon) I'd like to see how strong this trend can continue. With shale oil fields no longer providing growth the economy will need other sectors to contribute.

Industrial production took a step up to 104.14 from a March reading of 103.46. This is in line with the ISM manufacturing index from a few weeks ago. A lot of this is in reaction to the somewhat weaker dollar. I'm not expecting the number to stay strong now that the dollar appears to be rebounding a bit. As long as growth can remain intact, albeit weaker than normal, I think we'll be OK. It will put the pressure on industrial companies to lower costs(think layoffs and more automation).

 Then we received CPI coming in at 0.4% and core CPI at 0.2%. Let me get this off my chest but Core CPI is kind of worthless in my opinion. It excludes food and energy which is a huge component of every one's daily expense, and baked in cost for goods and services. Yet it's proclaimed to give us a "true" sense of inflation. Anyway the number was strong compared to recent months, but I think a lot of that is attributable to the bounce in oil this spring. Either way a lot of people seemed to confuse this number as a reason why the Fed is more likely to increase interest rates this June. That's a partial reason, but according to the Fed minutes CPI is still running below their expectations.

 This all brings us to the Fed minutes where a June rate hike is really on the table.

"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation marking progress toward the Committee's 2.0% objective, then it would likely be appropriate for the Committee to increase the target range for the federal funds rate in June."

Based off that sentence alone it was enough to get people all worked up. There was thrashing, blaming, I told you so's, buying, selling and much more in reaction.  What no one really mentioned is that the Fed has really been saying a lot of different things lately. In December we were to expect 4 rate hikes this year. Then they blamed foreign economies to say that wasn't happening. Then foreign economies were no longer a concern. Then all the sudden data dependency didn't matter and expectations for things to improve were sufficient.  

I can Monday morning quarterback all I want, but the Fed has a really tough job right now. I wouldn't take Janet Yellen's position even if I were qualified for it. But there is a lot going on under the hood that probably isn't even mentioned. The Fed will need to gradually raise rates, and they even said that in the minutes this time.  There is a lot of money riding on their every decision, and not just for Wall Street. Main street has a big stake too in the form of pensions, insurance, as does government, and foreign countries. 

This all led us to a wild week where the S&P started around 2050. Then hit 2070 only to fall 45 points to 2025. Finally it ended up right about where it started, but up a few points. What wasn't mentioned by most people is how the market actually finished the week higher ever so slightly.  But I thought the prospect of higher interest rates were bad for stocks? Widespread knowledge on TV and the internet proclaims higher rates are horrible for the economy, and by default stocks. I mentioned on the Facebook(be sure to Like) page before that higher rates don't mean always mean the stock market heads down. I think we'll find out who is right. But just to be clear I'm not the smartest person in the room. Nor the most interesting. That's the Dos Equis guy you're confusing me with.

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