New Articles

Fed Raises Rates Despite Data

Economic data doesn't show much growth in shipments of export cargo and import cargo in international trade.

Fed Raises Rates Despite Data

As expected, the Federal Reserve opted to raise interest rates 25 basis points yesterday, from 1.00 percent to 1.25 percent. This is the second increase in 2017 and the third in the past seven months.

On the heels of additional soft inflation data released this week, the Fed’s decision to move forward with a second-round increase this year appears to be motivated by both a push from the market with today’s rate hike fully priced in, according to Bloomberg, as well as a desire to rebuild the monetary policy tool kit.

Justification from the data, on the other hand, as the economy shows lingering signs of weakness carrying over from the first-quarter amid still-sluggish consumer activity, modest labor market gains, and cooling inflation, appears to be the missing component that would normally be at the forefront of an accelerated rate path. In other words, the Fed’s decision to raise rates today, while expected, appears to be little motivated by the data, leaving the future pathway for rates even more uncertain at this point.

Acknowledgement of the recent decline in prices within the statement as well as with a modest downward revision to the forecast, appears to be taking a backseat to the Fed’s general optimism for improvement in growth and inflation. Without sizable and clear additional weakness, the Fed appears steadfast in its commitment to one additional rate hike this year. Once again, the Fed’s credibility is on the line as the data argues for quite an opposite position.

Lindsey Piegza, PhD, is chief economist at Stifel Fixed Income.

US created 227,000 jobs ianuary, including at companies engaged in shipments of export cargo and import cargo in international trade.

US Jobs Report: Behind the Numbers

Nonfarm payrolls rose by 227,000 in the first employment report of the new year, significantly stronger than the median consensus of 180,000, according to Bloomberg, and the fastest pace of job creation in four months. The three-month average rose from 148,000 to 183,000 in January while the trailing twelve-month average was little changed at 195,000.

The fastest pace of job creation in four months should be enough to buoy market optimism and put the Fed on notice. But from a monetary policy standpoint, Fed officials are increasingly focused on wage growth as opposed to the headline payroll number as an indication of the health of the US labor market. It’s not about the number of jobs created but the quality of jobs created translating into a rise in wages to jumpstart consumption and investment flows in the broader economy.

A significant deterioration in the upward trend in wages that had been at the forefront of many policy makers’ argument for a continued removal of accommodation has now lost its luster. In other words, it’s a good thing the Federal Reserve made no mention of the March meeting in this week’s FOMC statement. After all, it’s going to be difficult for the Fed to justify any change to policy amid a sea of uncertainty from a fiscal standpoint, coupled with waning momentum in one of the key indicators used to argue in favor of a near-term rate hike.

Note, this is not officially the first employment report released during the Trump presidency, but the survey for the January employment report is from December 18 through January 15. Thus, the survey for the January release ended prior to Trump’s first day in office on January 20.

Lindsey Piegza, Ph.D., is chief economist at Stifel Fixed Income.

Trump policies could mean fewer shipments of export cargo and import cargo in international trade.

US GDP Numbers: What Do They Mean?

United States fourth-quarter GDP rose 1.9 percent, noticeably less than economists had forecast, according to Bloomberg. For the full year, growth averaged 1.9 percent in 2016 on par with last year’s expansion.

Following a disappointing first half of 2016, domestic growth picked up momentum June to September. The improvement over the summer months, however, proved short-lived as growth declined once again heading into the final quarter of year. Supplemented in good part by a sizable rebuilding of inventories, investment appears to have gained some ground particularly in terms of intellectual property and equipment spending, a more positive theme that could continue to carry forward especially amid a pro-growth agenda out of Washington.

Residential investment was a surprising support to topline activity after two quarters of negative contribution. Going forward, however, the real estate market will likely continue to struggle to post positive gains amid even a minimally rising rate environment without noticeable improvement in incomes. After all, the consumer remains under pressure, still maintaining a positive but very moderate consumption level.

Durable goods orders fell 0.4 percent in December, the second consecutive month of decline following a 4.8-percent drop the month prior. Year-over-year, headline orders are down 0.8 percent.

Headline orders remain in negative territory, however, business investment appears to be gaining footing, which could be a positive indication for 2017, if said growth can be maintained.

Businesses at this point are reportedly optimistic with a series of pro-growth proposals from the Trump administration focused on reducing the cost and regulatory burden on consumers and businesses. The more recent agenda, however, of the White House on stricter trade agreements and potentially introducing large tariffs or taxes on exports into the U.S. could more than offset the gains from other areas of tax and regulatory relief.

Lindsey M. Piegza, Ph.D., is chief economist at Stifel Economics.

Donald Trump's policies on shipments of export cargo and import cargo in international trade played a role in how markets reacted.

Post-Election Markets: Temporary or Sustained Reaction?

As Donald Trump extended his lead against Democratic candidate Hillary Clinton last Tuesday night, the markets responded negatively with the world’s stock markets declining by two to five percent.

In the aftermath of a relatively soothing acceptance speech, however, with the president-elect noting his intention to be the president of all Americans, and furthermore to get along with all foreign allies, markets seemed to revert to a state of relative calm after the storm.

Of course it will take time for global investors to digest exactly what a Trump presidency will mean for the U.S. economy and the global marketplace, rendering initial reactions unreliable; nevertheless, early indications suggest a more favorable result than initially expected. President-elect Trump has articulated more moderate goals of pro-business government policies, including reduced regulation, a reduced and simplified tax structure, as well as a large fiscal stimulus program centered on infrastructure investment.

The market’s second-round reaction appeared increasingly more favorable, or at least more reasonable, to the potential policies a Trump administration would represent. Coupled with a Republican-led Congress, however, the market, more importantly, appears increasingly optimistic that said policies may actually come to fruition, causing real and positive “change.”

It is important, nevertheless, to keep perspective amid the excitement of the election, as striking equilibrium in the market will take time. There are still many weeks of 2016 left with a number of data reports yet to be released. And, while businesses and investors are thinking of the longer-term gains, finding potential silver-linings of a Trump administration and buoying equity markets temporarily at the prospect of reduced costs and regulation, the underlying state of the economy will continue to reflect the lackluster fundamentals that have been well-established for years, including declining business investment and moderate consumer activity, which should remain the focus of the Fed.

Trump may have struck a chord with many Americans and corporate America in his call for change, but change will be slow to come and the effects will be slower still. In other words, don’t expect the market’s initial reaction of higher rates to stand the test of time. Furthermore, it is not justified to anticipate a sizable rebound in Q4 GDP, or even in the early stages of Trump’s term, as a reflection of an anticipatory positive impact of “the largest tax cuts since Ronald Reagan,” reduced regulation, and a full-press intention to repeal the Affordable Care Act.

Lindsey M. Piegza, is chief economist at Stifel Fixed Income.