Fed Sets October End for Bond Buys Fed officials agreed at June’s policy meeting to end their bond-buying program in October, giving the experiment an explicit end date for the first time.
The tentative plan outlined in minutes of June’s meeting, released Wednesday, is to reduce bond purchases in increments at its next three policy meetings, including a $15 billion reduction in October, leaving it to buy no bonds in November. (…)
Officials also are carefully trying to manage the public’s expectations about their next moves. For several years, they tried to offer assurances that rates would stay exceptionally low. Now, they are expressing more uncertainty about how long they will stay low.
“Some participants suggested that the Committee’s communications about its forward guidance should emphasize more strongly that its policy decisions would depend on its ongoing assessment across a range of indicators of economic activity, labor market conditions, inflation and inflation expectations, and financial market developments,” the minutes said.
Officials have publicly encouraged a widely held view in financial markets that rate increases won’t start until mid-2015, but some expressed a worry at the June meeting that investors are getting complacent about the path ahead.
“Favorable financial conditions appeared to be supporting economic activity,” the minutes said. “However, participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions.”
Volatility in stock, bond and currency markets has been unusually low in recent months. That could be a sign “market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the Fed said. (…)
That’s like the Fed telling markets: “We don’t know what we’re doing so how can you be so sure?” (…)
Fed Has Little Uncertainty, Despite Forecasting Misses Federal Reserve policy makers have been consistently too optimistic about economic growth and too pessimistic about the falling unemployment rate. But ask them if they’re uncertain about their forecasts and this is their answer: no more than usual.
In 2012, Fed officials said they were more uncertain than usual about their forecasts for growth, unemployment and inflation. But over the course of 2013 their uncertainty has declined, and now almost all Fed officials are confident in their forecasts, according to the Fed’s self-assessment of uncertainty which was released Wednesday as part of Fed’s June meeting minutes.
Fed officials have recently been concerned that markets have grown too complacent. Yet even at the Fed, only three officials rank their uncertainty about growth as high, and only two are more certain than usual about their unemployment forecasts. (The minutes do not identify by name which Fed official makes which forecast.)
For the record, most Fed officials see growth of 2.1% to 2.3% this year and unemployment at the end of 2014 between 6% and 6.1%. Those forecasts were made in advance of their June 17-18 policy meeting, and already they’re beginning to look a little suspect. (…)
Divide on Inflation Grows
Minutes from the Federal Reserve’s June meeting suggest there is a growing gap between officials who believe U.S. inflation could remain too low for the Fed’s comfort and those who believe a spike in consumer prices could be closer than forecasters think.
Some policy makers “expressed concern about the persistence of below-trend inflation,”the minutes said. Indeed, a couple even suggested the central bank might have to let unemployment fall below its long-term normal rate in order to ensure inflation moves back toward the 2% target.
That sentiment was far from unanimous, however. “Some others expected a faster pickup in inflation or saw upside risks to inflation expectations because they anticipated a more rapid decline in economic slack.” (…)
Pricing in the Cost of Higher Prices The Federal Reserve may consider the recent pickup in inflation as transitory, but Treasury investors may opt to protect themselves against rising prices nonetheless.
Fed’s Bullard Says Unemployment Drop to Push Inflation
HOUSEHOLD FORMATIONS RISING AGAIN?
In my June 2 SHOWTIME! post, I pointed out that young adults employment was accelerating which could result in more household formations and higher demand for housing from first-time buyers. June employment for the 25-34 age group jumped 224k, more than offsetting the 184k decline of the previous 3 months. Since November 2013, young adults employment has surged 717k, accounting for 26% of all new jobs during the period. Y/Y, young adults employment is up 2.3% in June compared with 1.6% overall. The unemployment rate for the 25-34 cohort has dropped to 6.5% from its 10.5% peak in May 2010.
Young adults are also re-entering the labor force with 526k additions since last November, the largest 8-month increase since 2000. Given this apparent greater confidence coupled with higher income, we could be seeing the low point in household formations which, at the margin, might soon begin to impact demand for housing and housing related goods and services.
Here’s a chart on U.S. household formations since 1947 courtesy of Sitka Pacific Capital Management. Household formations had never declined until the 205k drop in 2013.
JJ Abodeely, a Director and Portfolio Manager for Sitka Pacific Capital Management and one of my long-time readers wrote an excellent piece on how negative household formations impact the economy. Here is a link to a free copy of the entire piece, which is a product of Sitka’s twice monthly Strategy & Research service. You can access a few more recent publications for free and learn more about subscribing by registering here.
Sitka’s “2014 Annual Letter: Lessons Learned the Hard Way”, accessible through the link above, is an excellent read with original buy-side research and analysis.
Fewer Americans Than Forecast Filed Jobless Claims Last Week
Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, a Labor Department report showed today inWashington. The median forecast of 45 economists surveyed by Bloomberg called for 315,000. There was nothing unusual in the data and no states were estimated, a spokesman said as the figures were released.
The four-week moving average, a less volatile measure than the weekly figures, dropped to 311,500 last week from 315,000.
Daddy, are we there yet? (Chart from Doug Short)
Skills Shortage Means Many Jobs Go Unfilled Growing numbers of small-business owners say unfilled job openings are thwarting their growth at a time of improved confidence in the economy.
Teens Are Having the Worst Summer for Jobs Since 2010 Teens had a harder time getting a summer job in June, with teen hiring down 15% from a year earlier, according to a report from Challenger, Gray & Christmas, Inc.
Overall, teen hires are down 12% for the summer so far compared to last year, with 878,000 teens added to payrolls in May and June. Still, the teen unemployment rate managed to decline on the year–most likely because fewer teens are looking for summer jobs.
June’s participation rate of 40.5% is just shy of the record low 40.3% participation rate recorded for the month in 2011 and 2010, according to Challenger.
Labor Crunch Besets U.S. Restaurants as Dining Demand Rises
A labor crunch fueled by improving consumer confidence is cooking in the restaurant industry as venues from San Francisco to New York increase wages and benefits to attract cooks, servers and dishwashers.
“We had an open call for staff I posted on at least three sites at up to $80 an ad,” said Casey Thompson, executive chef at Avelinein San Francisco. “Zero people came.”
Thompson increased hourly pay at the newly opened restaurant to $17 an hour from $11 for cooks who prepare abalone, pig cheek and seaweed soda bread. (…)
China Exports Up on U.S. Demand Chinese exports grew in June on the back of strengthening U.S. consumer demand, in a positive sign for China’s factory sector and for the global economic outlook.
Chinese exports expanded by 7.2% year-over-year in June, compared with the 7% year-over-year increase in May, according to China’s General Administration of Customs on Thursday. This was below the median forecast of 10% growth from a Wall Street Journal poll of 21 economists.(…)
But China’s weak first-half trade results, which saw imports and exports grow by a combined 1.2%, will make it “tremendously hard” for China to reach its 7.5% trade growth target for 2014, Customs Administration spokesman Zheng Yuesheng said Thursday.
(…) U.S. imports of goods from China increased in each of the past four months to reach $37.99 billion in May, according to Commerce Department data. Despite tepid global economic growth in recent years, China has continued to pick up market share. Nearly 20% of goods imported globally by the U.S. now come from China, up from 16% in 2008, although some say rapidly rising wages may blunt China’s advantage.
China’s trade surplus was $31.6 billion in June, well below May’s $35.92 billion, but still strong. Imports grew by 6% year-over-year in June compared with a 1.6% decline in May, beating the economists’ median forecast of a 5.4% rise. (…)
French and Italian industrial output falls
French industrial output plunged 1.7 per cent in May compared with a month earlier, according to the country’s official data. Meanwhile, in Italy industrial production suffered its steepest drop since November 2012, falling 1.2 per cent from April.
The Dutch manufacturing sector also took a hit in May, with output falling by 1.9 per cent compared with a month earlier.
The contraction comes just days after industrial production in Germany, Europe’s economic engine, dropped the most in two years, due to sharp falls in the manufacturing and construction sectors.
Surprised? Not if you read Markit’s PMIs. This is from the July 1 report:
The recovery in the eurozone manufacturing sector was extended to a twelfth successive month in June. Signs that the upturn is losing momentum were still evident, however, as growth of both output and new orders slowed since May.
National PMI readings improved in Ireland and Spain, reaching a two-month high in the former and a seven-year record in the latter. PMI indices fell in all of the other nations, although only France and Greece signalled outright contractions.
June saw manufacturing production expand at the slowest pace since September 2013. The weaker trend was most evident in France, which saw output
contract for the first time in five months and at the fastest pace during the year-to-date. Slower production growth was meanwhile registered in Germany (nine-month low), Italy, Ireland (both four-month lows), the Netherlands (11-month low) and Greece (three-month low). Underlying the slower expansion of production was a weaker increase in new orders.
OPEC Sees Rising Global Oil Demand
(…) In its monthly oil market report, the OPEC said global oil demand growth will pick up next year amid robust economic growth. World consumption will increase by 1.21 million barrels a day in 2015, compared with a rise of 1.13 million barrels a day this year, the group said.
The accelerating demand growth will be partly driven by an increase in oil demand in industrialized nations for the first time since 2010.
The trend is underpinned by surging U.S. oil demand, which will rise by 180,000 barrels a day in 2015, compared with a growth of 160,000 barrels a day this year.
In recent years, India and China have been the oil-markets’ growth engines. But OPEC’s data shows their consumption growth will now increase at a slower rate than the U.S., or ease.
The Curious Case of Copper & the Canadian Dollar
As we have oft-noted in the past, the commodity that has the tightest correlation with the Canadian dollar in recent years is copper — not oil (which accounts for about half the value of all commodity production in the country), not gas, not lumber, and not gold. That still-curious relationship has held up again in 2014— as copper dipped precariously early this year, so too did the C$. But since the early spring, both have made a Lazarus-like comeback, with copper bouncing back to its best level in more than 4 months and the C$ close to where it started the year (and nearly where it stood a year ago). (BMO Capital)
And the curious case of copper and Chinese equities: (Ed Yardeni)
It thus follows that the CAD and Chinese stocks should be in sync.
European Markets Hit by Espírito Santo Worries Worries over the financial health of Portugal’s largest lender sent shock waves through the country’s stocks and bonds.
Median LBO Multiple Soars To Mindblowing 11.6x
According to just released data by Murray Devine, the Median Ebitda multiple for buyouts has exploded to nosebleed levels, rising by over one full turn of EBITDA since 2013 alone, and at 11.5x in the first half of 2014 is nearly 2x higher than during the last LBO bubble peak in 2008, when the average company was taken private at a conservative 9.6x EV/EBITDA.
Hmmm…