Federal Reserve Raises Short-Term Rates 0.25%… As widely expected, the Fed raised overnight interest rates to a range of 2.00% to 2.25%.
What it means – The higher rates are no surprise, and it’s only mildly surprising that the Fed removed the word “accommodative” from its policy statement. This implies the central bankers believe they are getting close to neutral on interest rates, which make sense because the Fed’s favored inflation measure, core personal consumer expenditures, sits at 2%, matching the new overnight rate.
The disconnect from the latest meeting is that the Fed’s interest rate forecast shows another hike in December, and then three more next year, putting rates near 3.325% by the end of 2019. Investors only expect one or two rate hikes at the most next year. If 2019 is rocky, then we can count on one rate hike at the most. Then the Fed will revert to its old ways and become “data dependent.”
The markets took the rate hike this week as expected, with yields moving up a bit, the dollar gaining a little, and equities selling off a touch. As yields increase, bonds become more of a draw for investors, which should siphon some funds from equities. Or at least, that’s the theory.
Durable Goods Orders Spike 4.5% in August, Driven Higher by Aircraft… Excluding transportation, orders improved just 0.1%, much less than the expected 0.5%.
What it means – The report included a couple negative notes, like the 0.5% drop in core capital goods orders. But core capital goods had posted several months of strong gains, so a short-term reprieve isn’t much to worry about. More concerning is the 1% drop in motor vehicles, which reflects weakness on car lots where manufacturers are increasing incentives to boost sales. Based on demographic research, we’ve estimated slowing auto sales for some time. It looks like it’s starting to happen.
S&P/CoreLogic Case-Shiller Home Price Index Up 5.9% in July over Last Year… The growth rate slowed from 6.4% in June and fell below consensus estimates.
What it means – Strong gains out West, with Seattle up 12.1% and Las Vegas up 13.7%, were dragged lower by New York, up just 3.5% for the year and down 0.5% for the month. Washington, D.C. rose just 2.8% for the year, and Chicago gained 3.1%. New York was down for the fourth month in a row, highlighting a clear trend lower in the upscale apartment market.
Still, prices remain several percentage points higher than last year, so there’s no panic showing in the markets yet. Sellers are holding out in most areas and are being rewarded with substantial gains.
We must wait to see how long it can last.
New Home Sales Up 3.4% in August… New home sales figures were revised lower for June and July by 39,000, or just over 6%.
What it means – New home sales are up 12.7% over last year, but that’s in units. As for price, new homes are going out the door at $320,200, which is a mere 1.9% higher than this time last year. We’re still sitting at just 6.1 months of inventory, which is the long-run historical average.
The story with new home sales remains the same. Builders are doing a great job of matching inventory to sales, not wanting to get caught with a bunch of inventory.
Oil Inventory Up 1.9 Million Barrels… Both oil and gasoline inventories rose, pushing prices lower after a significant run up.
What it means – The OPEC group is struggling to respond to higher oil prices. With Brent Crude recently trading over $80, the highest level since 2014, there is the real possibility that prices spike near $100 if we get a shock to the system. We’re already dealing with lower Iranian and Venezuelan production, which we’ve discussed for some time. But if OPEC and others crank up production to drive down prices, then any extra supply in the system could cause the price of oil to plummet. The Saudis just announced they stand ready to pump an extra 550,000 barrels per day, if needed.
While the OPEC group tries to figure out the best way to manipulate prices, American producers are busy pumping out oil as fast as they can. We’re on track to produce a record 11 million barrels a day, and are exporting oil, gas, and natural gas. We’re not producing as much as we use yet, but we’re going the right direction, and sending a lot less money overseas to people who would love to see us fail.
Greeks Owe $214 Billion in Back Taxes, Roughly Equal to GDP of the Nation… This includes about 60% of all taxpayers. Roughly 40% of that comes from penalties and interest.
What it means – The lenders who bailed out Greece required reforms in several areas, including stronger tax enforcement. Tax evasion is so pervasive in the country that tax collectors have a schedule of bribes they will take to assist tax evaders in wiping their slate clean. Apparently, the efforts at collecting more tax revenue aren’t working very well.
The Institute for Applied Economic Research at the University of Tubingen in Germany estimates that 21.5% of economic activity in Greece happens in the black market, away from regulation and taxes. The same group estimates that only 5.4% of American economic activity happens in the black market.
Data supplied by Dent Research/Delray Beach Publishing
“When the facts change, I change my mind.
What do you do, sir?” ~ John Maynard Keynes
Our plan is “the plan will change.”
What is your plan?
Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.
A copy of our form ADV Part 2 is available on line.
WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Investor Resources, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient.
This message is intended only for the use of the person(s) (“intended recipient”) to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Investor Resources, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message.
Investor Resources, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion.