Federal Reserve Holds Rates Steady, Indicates Rate Cut This Year… The Federal Reserve changed its description of the U.S. economy and gave an updated estimate of rates, implying two rate cuts by next year.
What it means – The stock market’s best friend, the Federal Reserve, is back. The central bank’s dot chart, which anonymously shows where each member of the governing group thinks rates will be in the future, showed an average just above 2% for 2020, implying two rate cuts. That data, along with Chairman Jerome Powell’s statements, which were decidedly more cautious than before, gave equities a boost. It’s not that investors think borrowers will rush out to run up their credit cards, instead investors are expressing relief that the Fed won’t be an impediment to future growth.
But it’s not all fun and games. The Fed is cautious because the economy is slowing down. The Atlanta Fed’s GDPNow model shows 2% growth in the second quarter, falling from more than 3% in the first quarter. Inflation has eased, and we’re still at odds with China. Even if we resolve the trade war, there’s no assurance that economic activity will suddenly shoot higher. Future growth looks a lot like what we saw for most of the decade, muted. With stocks at record highs, this might not be the time to celebrate.
Oil Prices Fall and Then Shoot Higher… Global energy demand appears to be on the wane, weighing on oil prices, but recent tensions in the Middle East have provided support.
What it means – It’s almost as if some players in the Middle East are using violence and terrorism to prop up oil prices. By blowing up a couple of tankers, some force (did someone say Iran?) has managed to push up oil prices by few percentage points even as demand slides. But don’t worry, short of an all-out shooting war, oil prices should remain tame for the rest of the summer, keeping gasoline prices low for the important summer driving season.
Housing Starts Down Less Than 1% in May… Housing starts remained essentially flat last month after the April figures were revised almost 4% higher.
What it means – According to the latest numbers, the big drop in housing starts in April didn’t happen. Instead, the figures were revised higher, which makes the May numbers look odd. Compared to the original April report, housing starts rose 2.7% in May. But compared to the revised number, starts dipped just under 1% last month. Such are the vagaries of numbers.
But one thing is clear, housing starts aren’t out of the woods. Single-family housing starts came in at an annualized rate of 820,000 last month, which is down 12.5% from this time last year. Multi-family picked up the slack, up 13.7% to 449,000. But building single-family homes is where you get a lot of economic punch. Home building still isn’t pulling its weight in the economy.
Existing Home Sales Up 2.5% in May… Even with sales moving up, existing home sales are still down 1.1% over May of last year.
What it means – Existing home sales got a boost in May because of lower interest rates, which also drove up home prices. The average home price increased 4.8% over last year to $277,700, showing that home buyers are payment buyers. The price increase was the largest since August of 2018 and will drive the S&P CoreLogic Case-Shiller Home Price Index up in the months ahead. The better numbers will allow realtors and home sellers to breathe a sigh of relief because the 2019 selling season looked like a dud until May. But with supply limited to just over four months, there’s still not enough housing to keep prices at a level where new home buyers can enter the market.
Puerto Rico Oversight Board Lays Out Plan to Take Money From Investors… The federally created board wants to give some bondholders around 40 cents on the dollar while cutting pension payments for some Puerto Rico retirees up to 8.5%.
What it means – Pension plans across the nation eventually will have to balance the books, and they’ll do it on the backs of investors. Cities in California have done this, Detroit did this, and now Puerto Rico is doing it. Investors who in good faith handed over their cash in 2014 for general obligation bonds are being told the bond issues were “illegal” because they put Puerto Rico over its statutory debt limit. The solution isn’t to unwind the bond issuance and calling it even, it’s to tell investors “be happy that you get anything,” and letting Puerto Rico keep most of the money.
The oversight board also proposed cutting some pensioner payments, but only on about one-third of retirees, and with a cap on the cuts of 8.5%.
The deal shows where things will go for cities like Chicago and states like Illinois. If you hold bonds issued by these governments, get out while you still can.
Researcher Claims Heat Will Kill Hundreds in Seattle Each Year Due to Climate Change, Ignores Little Things, Like Air Conditioners… The claim was big and bold, and published in The Seattle Times. The city is unprepared for heat, especially if temperatures climb due to global warming, and extreme heat events could cause 725 deaths per event. The report noted that daily mean temperatures could reach 97 degrees at their highest.
Southerners have a message for their northwestern brothers – buy air conditioners.
Like much of the alarmist language surrounding global warming, researchers often ignore the fact that people adapt. It seems unlikely that Seattle residents simply would sit around for the next 80 years as temperatures rose and not address the issues, much as coastal cities already are changing their drainage plans and storm systems. This doesn’t mean global warming isn’t real, it just means we should be realistic in our expectations of how people will react over time.
Data supplied by Dent Research/Delray Beach Publishing
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