FOMC Announcement Pushed US Dollar Down Big Time

The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.

The Fed seemed to indicate that “gradual” policy tightening will continue.

The Federal Reserve will begin winding down the stimulus program it embarked on to save the economy from the financial crisis. As expected, the Fed unanimously declined to raise interest rates.

The Fed predicts inflation will stabilize around the Committee’s 2% objective over the medium term despite inflation being below 2% in the near term. The Fed said they continue to expect “gradual increases in the federal funds rate”.

Fed Announcement Pushed Down the US Dollar

What the drop in the US dollar is telling us is that the Federal Reserve is dragging its feet. Just a few months ago, the Fed suggested we would get a rate increase in September. Instead, the Fed has backed off of that and now is toying with the balance sheet. The Fed seems to be telegraphing that it wants to slow down on tightening if inflation and wages don’t play out the way that they expect. I think the low inflation rate and low wage growth is really bugging the Fed because inflation should not be this low, at this time, in the economic cycle. Without a threat of runaway inflation, I think the Fed now feels that there’s no reason to rush another rate hike. This is all dovish which explains why the US dollar took a big dump today.

The FOMC announcement suggests they will begin quantitative tightening (QT) in September as they begin rolling off the $4.5 trillion portfolio of bonds it has accrued on its balance sheet, largely in the years after the crisis and the Great Recession. Balance sheet reduction is really the new QT as explained here.

The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the market evolves as expected.

The Fed also offered a bit more information on the balance sheet reduction strategy. Having ballooned to $4.5 trillion thanks to QE, the Federal Reserve has already announced a strategy of gradually limiting the reinvestment of proceeds of maturing assets. The question has been the timing. This statement suggests it will begin “relatively soon”, whereas previously they had merely stated it will start this year. I think traders are pricing in a balance sheet reduction to start either in September or October. Efforts will entail allowing a restricted level of proceeds from the bond portfolio to run off. The program will begin at $10 billion per month and increase to $50 billion. Fed officials estimate that once the program has run its course, the balance sheet will probably still exceed $2 trillion.

Chair Janet Yellen and many others have suggested that the balance sheet runoff should not be disruptive to markets, though it’s possible that QT may push up rates if demand for the bonds the Fed is rolling off are not absorbed by private markets and central banks in other countries. However, we do not see any sign of that happening yet.

Janet Yellen really tried to downplay the planned balance sheet reduction last month.

The other big focus in Wednesday’s FOMC announcement was the Fed’s perspective on inflation. The core personal consumption expenditures index has dropped away from the central bank’s target for the last four months. The softer inflation figures together with the probability of a September balance sheet reduction means that December is likely the next month the Fed will consider hiking rates.

General inflation, excluding energy and food prices, has declined and is running under 2%.

Fed Board Chair Janet Yellen told Congress that temporary variables like prescription drugs and cheaper cellphone programs were behind the inflation downturn.

Markets didn’t expect the Fed to increase rates at this meeting. Dealers from the fed funds futures market are assigning about a 50-50 chance the central bank does one more rate hike before the year’s end.

In assessing the economy, the FOMC announcement showed that the committee held to its assessment that action was rising moderately so far this year. On inflation, the statement removed the word “somewhat” from June’s verbiage and said simply that inflation was running “under two percent,” a subtle tweak which nonetheless probably signifies officials are somewhat more cynical about reaching their mandated objectives.

Average hourly wage growth was stuck around 2.5 percent. Other inflation measures are even lower, with the Fed’s preferred estimate, the personal consumption expenditures index, at 1.4 percent.

Looking further ahead, we are still on with the prediction for two rate increases in 2018, anticipating reasonable 2-2.5% GDP growth over the next year and a likelihood that inflation will slowly return to target, helped by a tight labor market and the possibility of a gradual uptick in wage growth.

If you have any thoughts on the FOMC announcement feel free to comment below.

Here is the full FOMC announcement.

FOMC Announcement

Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

Janet Yellen Testimony Economy Strong Enough For Rate Hikes

The US economy is healthy enough to absorb gradual rate increases and the reduction of the Federal Reserve’s balance sheet, Fed Chair Janet Yellen testimony before Congress on July 12, 2017.

Federal Reserve Chair Janet Yellen told Congress on Wednesday that the bank hopes to keep raising a key interest rate and also intends to begin this year, the reduction of its bond holdings.

Yellen took note of several factors, such as household wealth and job gains that she said should fuel growth.

In what could be one of her last appearances on Capitol Hill, Yellen portrayed a market that, while growing gradually, continued to add jobs, gained from continuous household consumption and a recent leap in business investment, and was currently being supported too by stronger economic conditions overseas.

She blamed the economic slowdown in the first half of 2017 on inflation. She said Fed officials are watching developments closely to be certain price gains go back toward the 2 percent inflation target of the Fed.

Janet Yellen Testimony Freak Out Over Inflation

Janet Yellen seemed a little freaked out over the big drop in inflation over the last few months.

I take Yellen’s comments on inflation to mean that the economy should not have the CPI plunging in this part of the economic cycle. In fact, just the opposite should be occurring. But she added that it was considered by officials as an anomaly; inflation is predicted by the Fed next year.

Many economists believe the Fed, which has raised rates three times, will increase rates yet another time this year.

The Fed continues to anticipate that the development of the market economy will justify gradual increases in the federal funds rate over time while reductions in the Fed’s holdings of more than $4 trillion in securities will probably start “this year”.

In her prepared testimony before the House Financial Services Committee, Janet Yellen testimony repeated the message she’s been sending: the market has improved enough that it no longer requires the support the central bank began providing in 2008 in the aftermath of a serious financial crisis and the deepest recession since the 1930s.

In light of the continuing expansion, the Fed plans to keep raising its benchmark rate of interest and to lower its investment holdings, Ms. Yellen said in prepared testimony. She did not offer details concerning the time of the next actions of the Fed. Analysts expect the Fed to begin shaving its bond portfolio before the end of 2017.

The economy began the year with a slow growth rate of just 1.4 percent, it has regained momentum in recent months, aided by strong job gains, a revival of business investment and a strengthening of international markets.

Bottom line: the market is at full employment and the Fed is moving rates. As the Fed reinvests some of the bond holdings which mature monthly, they will decrease that reinvestment to reduce their balance sheet which will mark the beginning of QT (quantitative tightening). Many believe that QT began this year when the Fed did a series of rate hikes.

The Fed needs to keep policy accommodative to keep on supporting the recovery, but may hit a “neutral” rate quicker than anticipated. Estimates are that inflation has been dropping so fast that we could be near zero right now. Yellen has said the Fed expects estimates of the inflation rate to grow over time.

Yellen said in her testimony that as it stands rates “might not need to rise all that much farther” to reach neutral.

Yellen said growth remains moderate with business investment and consumer spending picking up, and the US economy is benefiting from growth in other countries too.

A strengthening in economic development abroad has provided significant support for U.S. manufacturing production and exports, Yellen said.

The Fed slashed its key policy rate to near zero to fight the worst economic recession since the 1930s, and kept it there for seven years before nudging it higher in December 2015. It left the rate unchanged before increasing it again in December 2016, March 2017, and June 2017 of this year.

At its June meeting, the Fed indicated that it expected to start decreasing its $4.5 trillion balance sheet after this year, a measure that could put slow upward pressure on longer-term prices for such things as home mortgages.

Yellen said, the market seemed to be in a virtuous loop of hiring, investment and spending which should increase resource usage somewhat further, thereby fostering a quicker rate of wage growth and price increases.

The Janet Yellen testimony was fairly uneventful except for her comments on falling inflation which seemed to baffle the Fed as to why this was happening at this point during the economic cycle.

Jolts Job Openings Down But Hiring Up

The JOLTS Job Openings report showed U.S. companies posted fewer job openings in May but hiring picked up and people are quitting their jobs — both bullish signs for the economy.

New government statistics show American companies have made progress filling their record number of job openings, as hiring rose in May while the amount of job openings in the labor market dipped to just shy of 5.7 million.

JOLTS Job Openings

There were broad increases in professional, retail, and business services. That narrowed the gap between job openings and hiring, which had raised concerns of a skills mismatch in the market.

JOLTS job openings dropped 5 percent in May to 5.7 million, the Labor Department said Tuesday. Meanwhile, hiring rose 8.5 percent to just under 5.5 million.

The hiring rate rose two-tenths of a percentage point to 3.7 percent.

The Bureau of Labor Statistics’ monthly JOLTS job openings report — an acronym for Job Openings and Labor Turnover Summary showed openings in May dropped off to the lowest level since January.

The job openings dip in May shows further evidence that the economy is hitting the wall of maximum employment.

This JOLTS job openings report is a sign the market at 4.4 percent unemployment is nearing full employment when almost all people who need a job have one and the unemployment rate mainly reflects the normal churn of people that are temporarily out of work. Usually when unemployment drops this low, companies have to offer more pay. I think faster wage growth is coming.

As the bull economy ages, there is going to be fewer available jobs out there simply because companies have hired all the workers they need for now.

Hiring, meanwhile, surged north of 5.4 million to the highest level the market has seen since December 2015. Substantial upticks in hiring from business and professional services, and educational services, resulted in 25,000 and 121,000 more employees than the month before.

The JOLTS report is among the data watched by Federal Reserve officials as they track both inflation and the labor market.

Quits are typically regarded among analysts as a sign of optimism that employees feel good about their choices.

The amount of people quitting their jobs has increased 7.1 percent to 3.2 million. People usually quit when they either find a new job, often at higher pay, or are convinced they will be hired elsewhere. Quits gauge workers’ willingness to depart present positions in search of higher wages. Coupled with increased hiring across sectors, the equally broad-based increase in the quit rate bodes well for continued wage gains.

Average hourly earnings have failed to break above 2.5 percent on a year-over-year basis. Economists say a growth rate of between 3 and 3.5 percent in salary is needed to bring inflation near the Fed’s 2 percent target.

Layoffs were also up in May at nearly 1.7 million, tying March for the second-worst month so far this year. That’s still a respectable level at this stage in the economic recovery, but layoff upticks were seen across many different industries such as education and health services. Still, current job growth is more than enough to absorb the uptick in layoffs.

Jobs Report Shows 222,000 Jobs Added In June

The jobs report showed that non-farm payrolls jumped by 222,000 jobs in June, the Labor Department said on Friday, beating economists’ expectations for a 179,000 gain.

Data for April and May was revised to reveal 47,000 more jobs than previously reported.

Wage growth was unchanged from May and softer than expected. Average hourly earnings rose by 0.2% month-over-month, and 2.5% year-over-year.

The Federal Reserve looks like they were right when they said economic weakness in the first half of this year was transitory although I’d like the July jobs report to confirm this. The Fed seems on track for a possible rate increase toward the end of the calendar year as well as toward a decrease in the $4.5 trillion balance sheet.

Jobs Report

President Donald Trump has vowed to boost economic growth and further strengthen the labor market by cutting regulation and slashing taxes.

May’s jobless rate was 4.3%. A wider measure of unemployment, including discouraged workers and those who are working part time but favor a full-time job, inched up from 8.4% in May to 8.6% in June. It’s pretty obvious that the trend in employment growth is strong enough to keep the unemployment rate trending down.

Wages are finally being raised by companies. I expect unfilled jobs to boost wage growth, which has remained low.

The labor-force participation rate inched up to 62.8%, from 62.7%.

While the hourly wage component is below consensus estimates, the more powerful headline payroll number coupled with upward revisions, suggest that wages should rise in the near to medium term. The gain in hours in the work week suggests that economic activity is picking up under the surface.

Average hourly earnings increased 0.2% in June after gaining 0.1% in May. That raised the year-over-year increase in wages to 2.5% from 2.4% in May.

Despite the lack of a big pick-up in wage growth and core inflation, the Fed will push forward with hiking interest rates. The unemployment rate is already unusually low and is likely to fall further over the coming months.

The increase in jobs reflected hiring of new graduates. Ultimately the millennial’s are starting to get more jobs. Hiring in the service sector was strong. Health care hiring was up. The retail, construction and manufacturing sectors were weak but the economy appears strong enough to absorb these workers. There does seem to have been a modest deceleration of hiring within the last 12 months and an average of 187K a month job creation is high enough to absorb any remaining slack in the US labor market. The market needs to create 75,000 to 100,000 jobs a month to keep up with growth in the population.

Economists had expected employment gains of between 175,000 and 178,000.

The most shocking number in the jobs report came from the retail sector. Retail hiring rose for the first time since January, pausing an exodus of jobs from large department stores that are losing ground to ecommerce. There were 8,100 workers added in retail breaking its 4 month losing streak.

The employment gains of June exceeded the average for 2016, reinforcing views that economic growth is back on track in the second quarter.

The most important thing is that jobs are out there, and job hunters with marketable skills are in a good position to move on or move up.

Construction added 16,000 jobs.

The Fed raised its benchmark overnight interest rate for the second time this year in June. But with inflation retreating in May, economists expect another rate hike in December.

Wages are certainly weaker than anticipated, so it keeps alive the whole debate regarding the relationship between slack and inflation and how far the Federal Reserve should allow the unemployment rate to fall.

The most jobs were contributed by the medical sector. No jobs were added by the coal sector.

As the labor market reaches toward full employment, the pace of job growth is expected to slow. There is growing anecdotal evidence of companies struggling to find workers and so I expect these companies to raise wages to fill the vacant jobs.

Government employment rebounded by 35,000 jobs.

The automobile sector lost 1,300 jobs as slowing sales and inventories induce manufacturers to cut back on production.

Economic Growth Up On GDP Revision From Consumer Spending

GDP for Q1 was revised upward to 1.4% on an increase in consumer spending. The US economy enters its ninth year of economic growth in July.

The first GDP estimate for Q1 was originally reported at 0.7%. So Q1 GDP grew at twice the rate as originally thought. That’s great. Obviously 1.4% growth is not great but to have GDP growth at twice the rate than originally thought is awesome.

The idea that the Federal Reserve has hiked rates too far, too fast, and thus was crashing GDP is pushed a little ways off with this Q1 GDP upward revision. Clearly economic growth is not slowing as rapidly as everyone originally thought.

Some economists suspect the Q1 GDP number still underestimates the true rate of increase in the US. Regardless of the upward revision to GDP, President Trump’s stated goal of quickly boosting annual GDP to 3% remains a struggle.

Economic Growth

Analysts estimate that the U.S. market will grow at a 3% rate in the April-to-June interval, although the downturn in equipment orders and shipments reported earlier this week increases the danger that industry investment will supply less of a boost than expected.

A sustained average economic growth rate of 3% hasn’t been achieved in the US since the 1990s. The U.S. economy has grown an average of 2% since 2000.

Initial indications that GDP has accelerated in the next quarter are unlikely in the face of recent data on retail sales and manufacturing production.

United States Economy Teetering On Collapse

The United States economy is teetering, despite what the stock and job markets are saying. The US economy is consumption-centric. Growth in the current recovery has focused on three sectors that have fed through to consumption in its various forms: autos, energy, and financial services.

The scariest set of financial indicators to emerge in decades reveals what is crushing the dreams of record numbers of young, middle-class and older Americans.

While nationwide unemployment is down to 4.3 percent, policy experts and economists are warning of disturbing signals in the economy.

As any industry veteran can tell you, those on the sell-side are the second-to-last to surrender to a downturn in economic activity. A 401K Advisor or money manager will not produce negative forecasts when their most important objective is keeping its customers completely invested in risky assets.

United States Economy

The Citi Surprise Index shows a big disconnect between the economy and Wall Street.

The disconnect will not last for long as the chart above shows. Either the economy improves a lot over a short period of time, else the stock market comes plunging down to earth. It’s easier for the stock market to come down than it is for the Federal Reserve and republicans to somehow get this economy going, a feat that has remained elusive for the last 8 years.

Debt is what has kept the United States economy going for the last 8 years. Debt placed a floor under and then helped commercial property reach for the skies. Debt kept dying retailers alive. Debt also caused back-to-back years of record car sales.

Salaries for the typical American worker have hardly grown for decades, well-paid middle-class jobs are disappearing, and lots of the new jobs are from the low-wage service sector.

Consumers are being crushed by high healthcare costs and it partially explains why the American population grew at a small 0.7 percent this past year, the lowest rise since the Great Depression. As Russ Zalatimo of HudsonPoint Capital said, the tendency around recessionary times is that the birth date really drops like we are now seeing.

Bank of America Merrill Lynch stated autos are headed for a “decisive downturn” that will trough in 2021 at about a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers aren’t quite as grim, also reduced its revenue forecast, recognizing that the best days of this cycle have come and gone.

With the Trump White House scrambling to advance different measures to fuel economic growth – tax reform, infrastructure spending, maintaining jobs from fleeing abroad, some analysts say more radical steps are desperately needed.

Manufacturing isn’t just dead, say analysts. But it’s no longer dominated by smokestacks and rudimentary assembly. There are about 360,000 jobs in US manufacturing that are vacant and not being filled and companies are saying, “We need people to fill them.”

Meanwhile, retailers are currently choking on their debt as profit margins implode. Restaurants today employ 10.6 million individuals.

According to the Tax Policy Center, Trump’s tax reform could cause overall tax cuts of $6.2 trillion over the next ten years.

Losses on securities backed by automobile loans are piling up even as the unemployment rate has hit 4.3 percent, the lowest since 2001.

Additional evidence that the United States economy is teetering is becoming more and more apparent in credit card delinquencies. Experian reported that the domestic bank card default rate climbed to 3.53 percent in May, a four-year high. There are even nascent signs that families have started to struggle to make their mortgage payments.

Trader Alert – So Goes Oil Prices… So Goes the US Economy

Lance Jepsen of GuerillaStockTrading has issued a trader alert regarding oil prices. So goes oil, so goes the US economy.

Traders and investors are looking for a continuation of strong earnings to justify high stock valuations, now trading near their highest levels since 2004.

Most of the expectation for a recovery in earnings is predicated on oil prices being around $47 to $55 a barrel. If you don’t get those numbers, you do not get the strong earnings the stock market needs to warrant the high S&P 500 P/E ratio of around 25.

Oil Prices

U.S. crude futures have been pressured lower by a supply glut. They’ve averaged over $48 per barrel so far this quarter, however, traded around $43 on Friday and are down over 20 percent from February, when they hit an 18-month high.

U.S. stocks are in the ninth year of a bull run that has been fueled of late by bets on pro-growth policies from U.S. President Donald Trump. But with the timetable for reforms extending further into the future, earnings are regarded as a crucial support for stock prices.

Revenue expectations have dropped for 10 of 11 industry groups since early April.

The benchmark S&P 500 stock index as a whole is expected to deliver 7.9 percent profit growth, down from 15.3 percent in the first quarter, and below the 10.2 percent forecast in April, Thomson Reuters data shows.

While lower oil prices can help some sectors such as industrials and transports, as well as boosting consumer sentiment, high expectations for earnings growth mean any stumble will be felt broadly.

Energy industry profits are seen up an incredible 683% from a year ago according to Thomson Reuters data. Without energy, profit growth estimates drop to 4.8 percent for the quarter.

Fed Rate Hikes Are More About Slowing GDP Than Improving GDP

The pitch by the Federal Reserve is that GDP is growing which is why they are hiking rates. The Fed has said that rate hikes are representative of their belief that economic growth is picking up and so really, rate hikes are something that is bullish for the economy and GDP going forward.

If you believe that, I know a guy who has an original picture of Jesus Christ in a piece of brick that he’d like to sell you for just $9,999.99.

The mainstream financial media is running with Yellen’s story as if it’s based in reality.

You can’t afford to be so gullible if you have your scarce dollars invested in the stock market.

Here’s a reality check chart that shows, everytime, that rising rates are more indicative of a falling GDP than of a rising GDP.

Pitney Bowes Stock Rising Money Flow Setup

The Twiggs Money Flow is rising on Pitney Bowes stock making for a beautiful long entry setup. Back on May 2, 2017, the stock exploded higher after the company reported an earnings and revenue beat.

Pitney Bowes reported Q1 EPS of $0.36 versus the $0.34 estimate. Revenue also beat coming in at $836.6 million versus the $817.07 million estimate.

Marc B. Lautenbach, President and CEO, Pitney Bowes said, “We turned in a solid first quarter performance, driven by double-digit growth in Global Ecommerce, growth in both Production Mail and Presort Services businesses, and slight growth in our Software Solutions business. In addition, North America Mailing’s revenue rate of decline improved compared to prior quarters, driven by growth in equipment sales, and International Mailing performed similarly year-to-year compared to the prior quarter. In many ways, our results in the first quarter are what we envisioned and expected from the long-term growth initiatives and strategic investments we have been putting in place over the past four years. We are off to a good start and remain committed to meeting our financial objectives for the year.”

Pitney Bowes Stock Chart

The Twiggs Money Flow has been rising into the upward move.

The money flow is rising because traders are accumulating Pitney Bowes stock on pullbacks.

The Bollinger Bands are inside the Keltner channels which suggests a major move could happen when the stock breaks out of this trading range.

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