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The Fed On Hold…For Now

Last Wednesday (June 17, 2015), Federal Reserve released high anticipated FOMC statement, FOMC Economic Projections, and of course the Federal Funds Rate (interest rate). Federal Open Market Committee (FOMC) kept the interest rates on hold while they decreased their rate projections for 2016 and 2017.

The projections, or “dot plot”, which shows where FOMC members expect interest rates in the future, suggest that there will be one, or two quarter percentage (%) point interest rate increase by the end of the year. In March, the projections suggested more than two quarter percentage increases. That was before they knew that the first quarter of 2015 dragged on the economy…temporarily. 15 of 17 FOMC members believe that the first rate-hike will take place this year, same as March’s projections. Five officials foresee one increase in the rates this year by quarter percentage point, up from 1 official in March. Another five officials foresee 0.50% increase this year, down from seven officials in March. Two officials wants to keep rates unchanged this year. In March, officials did not know if the first quarter slump was temporary or not. They just believed negative economic news were due to “transitory effects” which includes West Port strike, low energy prices, bad weather, and stronger dollar. Now that we been seeing more positive economic news, many officials believe first quarter slump was temporary.

Officials reduced their median estimate for the federal funds rate by the end of 2016 to 1.625% from 1.875% in March, and to 2.875% by the end of 2017, down from 3.125% in March.

FOMC Economic Projections – June 2015 —– Source: Federal Reserve

FOMC Economic Projections - March 2015 ----- Source: Federal Reserve — FOMC Economic Projections – March 2015 —– Source: Federal Reserve

The Fed lowered their economic projections for 2015. They see economic output growth to 1.8% to 2.0%, from 2.3% to 2.7% in March. For 2016, it is seen growing by 2.4% to 2.7%, from 2.3% to 2.7% in March. For 2017, it is seen growing by 2.1% to 2.5%, from 2.0% to 2.4% in March. For 2016 and 2017, it’s essentially the same forecasts. They also changed their forecasts slightly for unemployment rate and inflation.

FOMC Economic Projections - June 2015 ----- Source: Federal Reserve — FOMC Economic Projections – June 2015 —– Source: Federal Reserve

In the statement, Fed policy makers reiterated that they must see “further improvement in the labor market” and be “reasonable confident that inflation will move back to its 2 percent objective over the medium term”. If the labor market continues to improve like they did in May, and inflation continues to improve, I strongly believe we will see rate-hike in July or September. It’s likely to be September because there will be no press conference in July. If the federal funds rate is increased in July, there will so much uncertainty and volatility in the markets because the Fed will not have a chance to explain their actions. However, there still might be rate-hike in July because the Fed wouldn’t want to increase rates too late.

During the press conference, Yellen said “…we have seen some progress. Even so, the Committee judged that economic conditions do not yet warrant an increase in the federal funds rate. While the Committee views the disappointing economic performance in the first quarter as largely transitory, my colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained, so that conditions in the labor market will continue to improve and inflation will move back to 2 percent.” It shows that the Fed is not confident enough to raise the rates yet. She said that the policy will be “data dependent”. I believe future US economic reports will be positive until December when we might get unfavorable weather again. Bad weather always derails the Fed’s view on the policy because it affects majority of country.

Regarding the US Dollar, or Greenback, Yellen said that the dollar “appears to have largely stabilized” and its significant appreciation is going to continue to drag on the economy for some time to come. The dollar has risen more than 15% against major currencies over the last 12 months.

US markets rose after the Fed announcements while the greenback (US Dollar) slipped. US markets continued to rise the next day.

Standard & Poor 500 ( "SPX" on ThinkorSwim platform) - Hourly — Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly

US Dollar ( "/DX" on ThinkorSwim platform) - Hourly — US Dollar ( “/DX” on ThinkorSwim platform) – Hourly

No Clear Direction Signs For US Economy…….Yet

Last Friday (May 8, 2015), non-farm payrolls report was released and it was in-line with expectations. 223,000 new jobs were added in April, and the unemployment rate fell by 0.1% to 5.4%, the lowest level since May 2008. While, this is a good news. March gains was revised down to 85,000 from the prior estimate of 126,000 (-41,000), lowest since 2012. I believe the April number (223,000) will also be revised lower.

Wage growth remained modest. Over the past 12 months, average hourly earnings have increased by 2.2%. As unemployment rate falls, wages should start to pick up speed, which also will push up inflation.

Fed officials are closely watching the labor market and other key economic reports, as they are in a tough spot on raising short-term rates, which have been held near zero since December 2008.

There is a very little chance of rate hike in June. I believe the Fed won’t hike the interest rates, unless over 350,000 jobs are added in May and unemployment rate goes down by 0.2% to 5.2% (which certainly will not happen).

First quarter was very weak due to; strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. When these four are combined together, it creates a heavy roof to push down economic growth.

Hiring has been strong in many industries, except energy. About 15,000 energy jobs were lost in April, worst month since May 2009. Lower oil prices increased the pressure on the energy sector. Low energy prices has caused energy companies to lose profits. As a result, they had to cut jobs. Recently, crude oil inventories supply were declining, which caused oil prices to rise above $60.

Last Tuesday (May 5, 2015), trade balance report was released and it exploded. The US trade deficit widened by 43.1% to a seasonally adjusted $51.4 billion in March, largest monthly expansion in the trade gap since December 1996 and the largest deficit reading since October 2008. Trade balance is when you subtract imports from exports. In other words, it’s the difference between imports and exports.

A biggest reason for the weakness was the 9-month slowdown at West Coast port due to a labor contract dispute. West Coast ports is back in business. Imports arriving though the West Coast port surged. Imports increased 7.7% in March, the largest increase on record. While exports only increased 0.9% in March, reflecting strong dollar impact. In the past 12 months, the dollar has jumped almost 10%. Strong dollar had made Americans goods and services less competitive in global markets. Bigger imports and smaller exports mean a bigger deficit.

I believe it’s not to worry about in a long term. Once the backlog is cleared, imports will drop and the trade deficit will also drop.

Recently, the dollar has fallen sharply because of weak US economic reports, including Gross Domestic Product (GDP).

On April 29, 2015 (Wednesday), GDP Advance estimate increased at an annual rate of 0.2% in the first quarter of 2015, down from 2.2% in the fourth quarter of 2014 (-2.0%). This is a huge difference. Economists were anticipating growth of 1% in the first quarter.

Again, the weakness was due to U.S. dollar, low energy prices, West Coast port strike, and the bad weather. West Coast port strike disrupted the flow of trade, increasing imports which negatively impact GDP. In the past 12 months, the dollar has jumped almost 10%.

According to the report, Real exports of goods and services decreased 7.2% in the first quarter, from an increase of 4.5% in the fourth quarter. Real Imports of goods and services increased 1.8%, from an increase of 10.4% in the fourth quarter.

I’m afraid that Q1 GDP will be revised to negative number. Second estimate (Preliminary) of Q1 GDP will be released on Friday, May 29, 2015.

First quarter GDP was disappointing. I believe the economy should bounce back in the 3 quarters of 2015.

US markets were very happy with the jobs report, but not with other economic reports. The Dow soared more than 250 points, or 1.5% on Friday. While USD bracket currencies were mixed.

Check out the charts below; Dow Jones and US Dollar. US Dollar has fallen signification after hitting of $100.27 on mid-April. Dow Jones has been in a range. Dow Jones chart includes something “extra”, that’s not included in the post here.

US Dollar Index - Four Hourly Chart — US Dollar Index – Four Hourly Chart

Dow Jones ($DJI) - Hourly Chart — Dow Jones ($DJI) – Hourly Chart

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Ugly Jobs Report Is Just Temporary

Last Friday (April 3, 2015), March non-farm payrolls came out very negative. Non-farm payrolls slowed in March to a seasonally adjusted 126,000, slowest since December 2013. Unemployment rate held unchanged at 5.5%. The downturn in the jobs report could delay the Federal Reserve’s plan on raising the interest rates. Federal Open Market Committee (FOMC) have said in the past that continued improvement in labor would be a key factor on the timing of the rate-hike. I, now, believe there is a little chance of rate-hike in June.

What caused the downturn in the labor market? I believe it was because of the bad weather, plunging oil prices, and the strong dollar. The bad weather have caused businesses, especially in construction, to lose profits and to halt hiring. However, weather is a transitory factor. Plunging oil prices have left the oil industry in the dust. Oil companies are not being able to make revenue/profit. As a result, they had to layoff some of their employees. Strong Dollar is putting pressure on export-driven manufacturers, resulting in lower sales leading to layoffs. It’s also making it harder for U.S. businesses to sell goods aboard. I believe majority of U.S businesses’ revenue or earning per share (EPS) will less than expected, for the quarter.

Not only did we get to see March jobs report, but there were revisions to February and January jobs reports. January job creation was revised lower to 201,000 from 239,000 (-38,000). February job creation was revised lower to 264,000 from 295,000 (-31,000). I believe March jobs report will also be revised.

The labor-force participation rate was at 67.8%, lowest since February 1978. It shows that there’s less confidence in jobs market. Therefore, people have stopped looking for jobs. Average hourly earnings rose 7 cents or 0.3% to $24.86. The earnings can be a indicator for inflation. If it increases, inflation is more likely to increase too. Walmart and McDonald are increasing wages for majority of its employees, if not all of them.

Reactions to the report:

U.S Dollar (foreign exchange, or Forex) reacted negatively. U.S Equity markets were closed for Good Friday. We will get to see the reaction of equity market in the morning (Monday, April 7, 2015). I believe it will rise since negative jobs report could delay the rate-hike, since low interest-rate environment can very attractive to investors, including me.

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