That was the loud-and-clear message coming from the Federal Reserve today. I say that because policymakers took a pass on raising short-term rates from the current 0.25-0.5% range, despite sounding relatively optimistic about the domestic economy.
Specifically, the post-meeting statement said that “household spending has been increasing at a moderate rate,” that the “housing sector has improved further” and that there has been “additional strengthening of the labor market.” It also said that prices might be low now, but that they should rise “as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”
So why not move? Because the world is a mess. Or in Fedspeak, “business fixed investment and net exports have been soft” and “global economic and financial developments continue to pose risks.” Chairman Janet Yellen also said in her press conference that weaker global growth and financial market volatility overseas was causing U.S. financial conditions to tighten somewhat.
Policymakers are apparently so concerned that they even lowered their projections for how many rate hikes they’re planning to implement this year. The average expectation is two hikes now, compared with four previously.
Not everyone favored a “do nothing” approach. Kansas City Fed President Esther George voted to hike rates by a quarter-point. But she was clearly overruled.
Personally, I’m less sanguine on the U.S. economy than the Fed appears to be. I believe the backdrop is more mixed. Unsold inventories have been piling up, while supposed early-year strength in retail sales was just revised away.
|Inventories are building up, another worrying sign for the U.S. economy.|
The jobs data has been relatively decent. But even it has some hair on it. Worrisome activity in the commercial real estate and auto markets also tell me that future growth is likely to disappoint.
So what does this all mean for the markets? Well, the Fed’s inaction and policymaker comments today caused the dollar to tank against almost every other major currency. That included safe haven-style currencies like the Swiss franc and the Japanese yen … traditional dollar alternatives like the euro and British pound … and so-called commodity currencies, such as the Australian and Canadian dollars.
Gold also reversed sharply, tacking on more than $30 an ounce at one point after declining earlier in the day. Higher-yielding, lower-volatility stocks that I favor, including utilities and consumer staples, surged even further in value. That helped push the broad averages higher. But bank stocks lagged notably, as did many biotech names.
|“All this central bank talk and “on again/off again” policymaking is deterring investors from focusing on the real issue out there.”|
Once you get past the short term, though, I contend that all this central bank talk and “on again/off again” policymaking is deterring investors from focusing on the real issue out there. We’re late in the economic cycle, and we’re late in the credit cycle.
That means this is going to be a more treacherous and volatile environment for investors, no matter what the Fed or its foreign counterparts do. So don’t let the latest chatter from Janet Yellen or Mario Draghi distract you from that. Ditto for the wild short-term swings we’re increasingly seeing in the markets.
Now it’s your turn. Was Janet right to sit tight on rates? Or should the Fed have gone ahead and hiked? Is it right to focus so much on global developments? Or should the Fed stick to its domestic knitting? Speaking of the domestic outlook, do you think the economy is doing well? Just okay? Lousy? Let me hear your thoughts in the comment section below.
Meanwhile, you were already debating the outlook for consumer spending in the last 24 hours.
Reader Anthony G. didn’t mince words, saying: “The Fantasy Island economy is now exposed. If the economy does not get a fix, it will shake apart like a street junkie.”
Reader Frebon shared this take on the latest figures and the economic outlook: “You can’t trust data from the government anyway. Take all the data with a grain of salt, find trends and look at the real economy and employment. What you’ll see is not very encouraging.
“Gold is not the way out because there is no demand, and therefore no inflation. Cash will actually be better because our data-dependent dodos at the central banks think negative rates are the way to go. If they can’t figure out a way to create demand, maybe Bernie is right. Get the money out of the wealthy’s hands and into the people of the middle-class who will actually spend it.”
Reader Richard L. added: “The majority do not know (maybe a better word is ‘understand’) that the U.S. economy is in shambles — and for sure, they do not know why the U.S. economy is in shambles. If the people did know how bad it really is, that would make the economy worse, because people would hold what little money they have even tighter.”
Finally, Reader Al said: “I have always thought that the consumer (American or otherwise) should purchase everything they really NEED, and save for anything they really WANT. The current state of the economy would be well-suited to saving as opposed to spending. Hopefully, the primary reason the consumer is not to be found is because they are being prudent and saving for their wants.”
I appreciate the viewpoints. I believe we are very late in this economic and credit cycle, and that consumers are stretched thin. Rising healthcare and housing costs are a real burden, and that’s offsetting the benefit of falling gas prices. It’s also worth mentioning that those falling prices have decimated the domestic energy industry, which became a much larger part of the U.S. economy than in the past during the shale energy boom.
For those and other reasons, I remain skeptical about the spending power of the average American consumer. And I remain concerned that a recession may not be very far off.
If you want to weigh in further on the economic cycle, make sure you head to the discussion section below. Or do what I suggested yesterday: Get more details on the 2016 Money, Metals, & Mining Cruise, scheduled to sail on July 10-17 from Anchorage to Vancouver. I plan to discuss the economic and credit cycle in detail on board, and would love to meet with you there. You can call 800-797-9519 or click here to learn more.
Donald Trump won the states of Florida, Illinois and North Carolina overnight, while losing Ohio to John Kasich. Hillary Clinton swept almost all of the Democratic primaries. It appears both front-runners also won in Missouri. But the races were so close (within margins of less than 1 percentage point) that we could be headed for a recount.
The commodity rout may soon claim its next victim. Peabody Energy (BTU) surged along with a bunch of other super-junky oil, gas, coal, steel, and iron ore stocks courtesy of the “China stimulus will save us” trade in the first several days of March. It soared from around $2.20 to more than $7.
But the company just admitted in a Securities and Exchange Commission (SEC) filing that it may not be able to continue as a “going concern.” Or in plain English, it might go broke under the weight of falling demand and $6.3 billion in debt.
Shares of embattled drugmaker Valeant Pharmaceuticals (VRX) plunged more than 50% yesterday after the firm lowered earnings estimates, made an embarrassing $600 million typo in a press release, and warned that it might breach debt covenants if it can’t file accurate financial reports on time. Large investors and hedge funds have lost billions of dollars on the former darling of the drug industry.
The London Stock Exchange plans to merge with Germany’s Deutsche Borse in a $30 billion deal. The transaction would create the largest stock exchange based and operating in Europe. But it’s possible another bidder such as Intercontinental Exchange (ICE) of the U.S. could come in with a higher offer.
So what do you think of the debacle at Valeant? How about the latest exchange combination in Europe? Will more commodity firms follow Peabody into or toward Chapter 11? Hit up the discussion section below to weigh in.
Until next time,