Last week was dictated by Jackson Hole. Low volume through-out the week persisted in anticipation of Janet Yellen speaking on Friday.
Many hoped that the Federal Reserve Board (FRB) chairperson would give further indication of policy direction. Hawkish and we could see rate increases sooner rather than later. Dovish and we could see a longer period of loose monetary policy. She came out hawkish, indicating that a rate hike was on the table for the next meeting in September. Markets are pricing in a 26% chance of the FRB raising in September[1]. Moral to the story is that while the FRB is talking … no one seems to be listening. Should Jobs data for August impress, I could see the FRB raising rates in September. As mentioned in last week’s blog, ‘Fed Up!’ the best of bad options for a hike would be September.
US Data
Durable goods were strong, coming in at 4.4% for July. GDP for the 2nd quarter was revised down to 1.1% from 1.2%. Consumer sentiment edged its way down to 89.8 from 90.4. Oil prices pulled back slightly in the wake of a stronger dollar and decreased confidence in a production freeze coming from OPEC[2].
Housing Market
New home sales impressed, jumping 12.4% in July and 31% over the last year. Last month’s increases amounted to 72,000 homes. While this is a dramatic increase that impacts not only home sales, but construction jobs, existing homes sales had a negative impact on the housing market.
While new home sales increased by 72,000, existing home sales contracted by 180,000 units. This fall of 3.2% calls into question the strength in the housing market. The positive is that the new home process has a longer cycle, creates job, and shows forward strength in the housing market. Existing home sales can be seasonally weak… but not typically in July!
International Data
The UK continues to struggle purchasing gilt’s across the open market. As rates continue to fall, less holders are inclined to offer their higher yielding gilt’s for sale.
German business sentiment pulled back as the Ifo index decreased to 106.2 from 108.3. The decrease comes as GDP for the 2nd quarter came in at 3.1% year over year[3].
Eurozone PMI for July came in at 53.3, a seven month high in PMI data for the region[4]. A good sign that the greater Eurozone area is disregarding any short-term impact the Brexit may have.
Conclusion
The FRB spoke and it does not seem that markets are listening. This dis-jointed behavior says one of 3 things:
- FRB has lost its credibility
- Markets do not believe FRB is going to hike rates
- Markets believe the FRB, but also believe the economy is not strong enough, spelling the potential of losses for the month following the increase.
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[1] www.jpmorganfunds.com – economic update
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar
[4] www.troweprice.com – global markets weekly update