DOW – 3 = 18,050
SPX – 1 = 2107
NAS – 5 = 5098
10 YR YLD – .05 = 2.35%
OIL – 1.43 = 51.61
GOLD – 5.90 = 1149.90
SILV – .28 = 15.19
I think the markets couldn’t quite figure out what to make of today.
In the late 1970s Sen. Hubert Humphrey and Rep. Augustus Hawkins sponsored legislation known as the Full Employment and Balanced Growth Act of 1978. The idea was to set monetary policy to try to achieve the goals of full employment, growth in production, price stability, and balance of trade and the budget. The Act also required the Federal Open Market Committee to report to Congress twice a year, in February and July; we used to call it the Humphrey-Hawkins testimony.
Testimony coincides with the publication of the Fed’s Beige Book, which was released today. The Beige Book cited improving consumer spending, mixed activity for transportation, positive reports on real estate, increasing lending activity, and “modest” wage pressures. The report did reveal trouble spots, such as the strengthening dollar, which led to soft growth around border areas, and the decline in oil and natural gas drilling.
The Humphrey-Hawkins Act expired about 10 years ago; perhaps because the goals of full employment, balanced budgets and balanced trade seem like Utopian pipedreams, but the Fed chair still heads to Congress twice a year to update politicians. Today, Fed Chair Janet Yellen delivered her testimony to the House Financial Services Committee. Tomorrow she will head over to the Senate and deliver the same prepared remarks. After the speech, the Fed head opens it up from questions from the politicians, which allows them to grandstand, bloviate, and generally demonstrate their ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge.
In prepared remarks, Yellen said she expects the economy to strengthen over the rest of 2015 and put the central bank on a path to raise interest rates “at some point this year.” She didn’t give an exact date, however she gave us a hint, saying: :If the Fed waits much longer to raise rates – as some institutions like the IMF want it to do – it might be forced to move aggressively once it starts. However, if it moves sooner, that could allow it to proceed gradually and observe how the economy and markets respond. An advantage to beginning a little bit earlier is that we might have a more-gradual path of rate increases.” A gradual path, she added, is a “prudent approach to take.” It may be prudent but it isn’t really data dependent, now is it?
Yellen pointed to cheaper gasoline prices, higher consumer confidence and a pickup in consumer spending, particularly new cars and trucks. And Yellen said the economy is still creating enough jobs to reduce the unemployment rate over time. She said the situation in Greece remains difficult and China could pose some risk to the US economy, but overall she was sticking with the optimistic tone and unwavering determination to hike rates.
During the Q&A session Yellen responded to questions about the government investigation into a Fed leak of information back in 2012; she also tried to explain that the GDP numbers are not fabricated from whole cloth; higher interest rates will make it harder to balance the budget; the Fed has no authority over the Puerto Rican debt problem; the Fed can’t do a bailout in the same way as they did in 2008; and there might have been an actual question about monetary policy in there somewhere, maybe. Generally the Q&A session is a sad indictment of our elected officials and today’s performance did not disappoint on that count.
Meanwhile, several new figures from the White House budget office’s “Mid-Session Review” are casting a shadow over projections made at the beginning of the year. The new estimates display U.S. GDP rising by just 2% this year before rebounding to 2.9% in 2016 – down from an earlier forecast of 3% growth for both years. Short-term estimates for inflation were also trimmed. The consumer-price index is now expected to post an annual average increase of just 0.2% this year, down from an earlier forecast of a 1.4% gain.
Meanwhile, San Francisco Federal Reserve Bank President John Williams delivered a speech in Phoenix to the Greater Phoenix Economic Council. Williams echoed Yellen’s views on the economy, citing improvement in the labor market and concerns about potential inflation as motivating factors to raise interest rates. Williams also provided familiar, yet largely ignored advice for Arizona by suggesting we could create a more durable economy by investing more in education.
Wholesale prices in the U.S. climbed more than forecast in June as the cost of fuel picked up. The 0.4 percent increase in the producer-price index followed a 0.5 percent gain in May. A broad pickup in prices would help strengthen the case for Federal Reserve policy makers to start raising interest rates this year. A shortage of eggs after an outbreak of bird flu continues to pressure food prices. Wholesale egg prices soared a record 84.5 percent last month after surging 56.4 percent in May.
U.S. factory production failed to advance for a second straight month in June. The Fed said manufacturing output was unchanged both last month and in May. Despite the soft manufacturing reading, overall industrial output climbed 0.3 percent after a 0.2 percent decline in May. Mining output jumped 1.0 percent and utilities production gained 1.5 percent.
It’s again crunch time in Greece as lawmakers gathered for a crucial vote on austerity and reform measures that will determine if the country will be eligible for a much-needed third bailout. Protesters threw Molotov cocktails at police in front of parliament ahead the vote on a bailout deal, and police responded with tear gas in some of the most serious violence in over two years. Meanwhile the IMF has issued an analysis of the deal saying Greece needs debt relief “far beyond” what European creditors have been willing to consider, including possibly deep “haircuts” on the value of Greek debt.
Prior to the vote, Prime Minister Alexis Tsipras tried to sell the deal saying that when he negotiated the agreement earlier this week, “it was the most difficult moment of my life. It was a decision which will be a burden for me for the rest of my life. I don’t know if we did the right thing. But I know we did something to which there was no alternative.”
So, he admits the bill will hurt the economy; that might be a first for a politician, at least the admission part. Tsipras just gave a sadly defiant speech, one of the saddest defiant speeches in the history of sadly defiant speeches. Last weekend the Greek finance minister resigned; today the deputy finance minister resigned. There is widespread revolt in the Syriza ruling party.
The vote just finished and the deal has passed. Eurozone finance ministers will hold a conference call tomorrow.
China’s economic growth proved resilient in the second quarter as policy makers stepped up support and a stock market boom – since soured – spurred services. GDP rose 7% in the three months through June. Despite the upbeat economic data, Chinese shares extended their slump. Shanghai -3%; Shenzhen -4.7%.
Elsewhere in Asia, the Bank of Japan kept monetary policy unchanged and largely maintained its upbeat inflation forecasts, even as it cut its growth outlook on soft exports and household spending.
It is earnings reporting season. Bank of America reported its quarterly profit more than doubled as legal expenses declined and mortgages increased. Don’t break the law as much and therefore don’t pay massive multi-billion dollar fines; instead make more mortgage loans – this is a truly innovative business model for financial institutions.
Netflix reported it added more subscribers in the second quarter than originally projected. Net subscriber additions rose about 94 percent year-over-year to about 3.3 million in the second quarter, beating the company’s forecast of 2.5 million. Revenue jumped 22.7 percent to $1.64 billion in the second quarter ended June 30, from $1.34 billion a year earlier. Net income fell to $26.3 million, or 6 cents per share, from $71 million, or 16 cents per share a year earlier.
Intel reported better-than-expected quarterly profit and revenue on Wednesday as growth in its data centers and Internet-of-Things businesses helped offset weak demand for personal computers that use the company’s chips.
Today is Christmas in July. If that sounds like a made-up, commercialized holiday…, well it is. Amazon decided to celebrate its 20th anniversary by having a big, one-day sale (today); they call it “Prime Day”, with big discounts for Amazon Prime customers. Walmart responded quickly with a plan to reduce its minimum order for free shipping and deeply discounted online deals. Meanwhile, Best Buy is promoting its “Black Friday in July” sales event. Target recently completed its own sale.
Honda’s U.S. financing division has agreed to pay $25 million to settle allegations the company overcharged minority buyers with higher interest rates on vehicle loans. According to the complaint, the company charged thousands of African-American, Hispanic and Asian/Pacific Island auto loan borrowers higher interest rates solely because of their race. Honda said it disagreed with how regulators determined discrimination but the company shares “a fundamental agreement in the importance of fair lending.”
The New Horizons spacecraft has done a fly-by of Pluto. After a nine-year, 3 billion-mile journey, the piano sized spacecraft just passed within 7,750 miles of Pluto’s frozen surface, snapping pictures and taking readings all the way. The images and the data took 4.5 hours to reach Earth even moving at light speed. Just the mere fact that New Horizons is right on target is amazing. NASA says it’s the equivalent of a commercial airliner landing within a tennis ball’s width of its target.
The New Horizons spacecraft carried a small canister with a few of the ashes of Clyde Tombaugh, the Nobel Prize winning astronomer who discovered Pluto at Lowell Observatory in Flagstaff back in 1930.
Some people wonder why we explore space, why we spend money and energy. Exploration is not necessarily a human trait; some cultures are xenophobic and shrink into isolation. Exploration has always been a part of the American culture. We have always been ready and willing to find new frontiers, even at great cost. We have been rewarded with the uniquely American characteristics of innovation, inquisitiveness and individualism that derive from the existence of a frontier. Exploration requires a sense of discovery, a hope for something beyond ourselves, a faith in something greater than ourselves. And each new discover expands our understanding and our minds. Each new discovery strikes a blow against isolation and decay, and strikes a victory for civilization and progress.
We are just now getting pictures back from Pluto. Nine years ago we didn’t know if the New Horizons spacecraft would reach its target and what we might find. And we don’t know what the next mission might discover, but the possibilities are endless.