The Federal Reserve Open Market Committee (FOMC) has been working hard for 2 weeks to make sure the markets expect a June rate hike. That may have all come crashing down this past Friday!
US Data
The week started out fairly good. Oil inventories were down and optimism was up, on hopes that some sort of deal would come out of the upcoming OPEC meeting. Consumer spending increased more than expected. ISM Manufacturing strengthened more than expected. Lastly, Inflation as measured by Core Personal Consumption Expenditures (PCE) increased by 1.6% year over year, the same as the previous month. The stability in prices along with improved manufacturing and spending set the table nicely for a FOMC rate hike in June.
On Friday, the all-important jobs report came out for May. At first glance the FOMC would be happy because the rate fell to 4.7%, the lowest level of this expansion. That is at first glance. As you dig into the report you find that only 38,000 jobs were added and the fall in unemployment is largely the result of a reduced participation rate (less people actively looking for employment). That rate slipped to 62.6%. The high point would 63% reached this past January[1]. 4 tenths of a percent does not sound like much, however this equates to somewhere around 1.3M workers…
This left large cap markets little changed for the week, with Mid cap and Small cap markets out performing, up 1% – 1.5%. 10-year treasury rates retreated to 1.72% from 1.84%[2] the prior week, making it out-perform large caps for the week as well.
International Markets
As mentioned earlier, OPEC met mid-week and hopes were high that the group would come to an accord on production caps. Doing so would lead to more support for oil prices, which currently sit just shy of $50 per barrel. Unfortunately, the predominant view was that a production slowdown in some regions allow them to proceed without production caps. At this point a production increase should be expected for OPEC countries.
The European Central Bank (ECB) met this week and did not change course on any activities. They indicated a willingness to further support or slow efforts depending on economic conditions… Duh.
Brazilian stocks advanced on continued efforts of the new president. There were several high level officials implicated in the corruption scandal of the prior president. Continued efforts like this make their economy more and more likely to successfully implement reforms.
Conclusion
Bottom line, the FOMC wants to raise rates, as they should. The low rate environment that exists leaves little in the way of tools for the FOMC to use in the event of a recession. On the other hand, a rate hike needs to be a prudent undertaking. If the economy is not running strong enough to withstand the action it could cause a correction or worse.
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[1] www.investing.com – economic calendar
[2] www.mfs.com – week in review