DOW – 162 = 17,348
SPX – 17 = 2079
NAS – 40 = 5019
10 YR YLD – .07 = 2.13%
OIL – 2.02 = 40.60
GOLD + 16.60 = 1135.10
SILV + .44 = 15.41
A new CPI report this morning shows inflation remains muted. The consumer price index, a measure of prices at the retail level, rose 0.1% in July to mark the smallest increase in three months. Yet the cost of housing, the largest expense for most Americans, continued to rise, up 0.4% last month, reflecting the biggest gain in more than eight years. And housing expenses have climbed 3.1% in the past 12 months, the largest annual increase since 2008. The prices of most other consumer goods were little changed in July. Food prices climbed 0.2% while energy prices rose a smaller 0.1%. Excluding food and energy, so-called core consumer prices also advanced 0.1% in July. Aside from shelter, prices for clothes and medical care also rose.
Even though energy prices were up slightly in July, that might not last; eventually the price at the pump for gasoline should reflect the price of oil, which has now dropped to a 6 year low of $40.60 per barrel. Based upon historical pricing for oil and gas, we should be paying about $2.00 to $2.10 a gallon at the pump. Gas prices should be declining in the next month or two. Oil has tumbled more than 30 percent since this year’s peak close in June and producers are maintaining output even after a surplus pushed prices into a bear market. The Energy Information Administration reported today that crude supplies rose 2.62 million barrels last week. Oil balances point to further oversupply throughout 2015. So energy prices might be disinflationary for the remainder of this year.
The Federal Reserve has set a target of 2% inflation. We are not there; not even close. The Fed has said that low energy prices are transitory, but low prices are lingering. And even though the economy has been adding jobs; 215,000 in July, and August seems to be on track for a similar number, we still see significant slack in the labor market and no signs of wage push inflation. Against this backdrop, you might not expect the Fed to hike interest rate targets, but in the minutes of the July Federal Open Market Committee meeting we find that most policymakers are itching to get off the Zero Interest Rate schneid.
According to the minutes, most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” and “Almost all members (of the FOMC)” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.”
On a separate issue, the Fed is still trying to figure out what to do with their $4.2 trillion dollar portfolio built up during the various rounds of quantitative easing. About $216 billion of proceeds from maturing Treasury securities come due by the end of this year; the Fed could reinvest, or they could let the securities expire, or they could phase out the investments. They might even time a phase out to coincide with raising rates. No decision was made at the July FOMC meeting. If the Fed decides to not reinvest, and that would be the default position of not doing anything, it would increase the supply of securities available to investors and put upward pressure on yields.
Investors reacted to the FOMC minutes by reducing the probability the Fed would tighten next month to 38 percent, based on pricing of federal funds futures contracts, compared to 50 percent earlier today. The policymakers sound like they want to raise rates but they just lack the confidence to pull the trigger. Now the counter point is that almost 7 years of Zero Interest Rate Policy and trillions of dollars of quantitative easing have not been enough to get the slack out of the labor market or stoke the coals of inflation. So what difference would a few months make?
And while some might argue that the Fed’s courageous action saved the economy (OK, Bernanke, Paulson, and Geithner can make that argument) and that might be true, but they did it with a long term price tag; it is likely that the markets are permanently distorted and at the least we have gone through 7 years of distortion and misappropriation. Further, the last crisis did not preclude the possibility of another crisis. If, or when, the next crisis hits the Fed doesn’t want to be sitting on a $4.2 trillion dollar portfolio with interest rates at zero. What bold and courageous action can the Fed take with no arrows in their quiver?
The minutes from the July FOMC portray a cautious Fed. They remember the taper tantrum of 2013, when then-Fed Chair Bernanke hinted at the possibility of ending QE. The markets responded with all the dignity of a pack of wild hyenas ripping and nipping at both bonds and stocks. When rates eventually rise, in September or December or later, Chair Yellen wants to make sure investors saw it coming.
Volatility prevailed in China’s stock market today, with a late afternoon rally reversing a sharp morning tumble as investors tested whether Beijing would step in to stabilize shares. The Shanghai Composite closed up 1.2% on reports of government intervention after falling as much as 5.1% during the session. Despite the latest stock turmoil, the yuan has held relatively steady this week following the central bank’s shock decision to devalue the currency on August 10.
A slump in emerging market confidence has led to $1 trillion in capital outflows from developing economies over the past 13 months, roughly double the amount that fled during the financial crisis. The sustained exodus of capital highlights concerns that emerging markets, suffering slowing growth and weakening currencies, are relinquishing their longstanding role as locomotives to become a drag on demand. From July 2009 to the end of June last year, a net $2 trillion in capital flowed into the 19 emerging markets. But as the funds now cascade out, a vicious circle is triggered. Currencies tumble against the US dollar, damping demand for imports and driving down aggregate demand. In June, for example, overall emerging market imports were 13.2% lower year-on-year.
German lawmakers have overwhelmingly voted in favor of Greece’s third bailout, ending months of heated negotiations. Prior to the vote German Finance Minister Wolfgang Schaeuble said: “There is no guarantee that this all will work…but due to the fact that the Greek parliament has already approved a big part of the (aid-for-reform) measures, it would be irresponsible not to use the chance for a new beginning.”
Intel announced several new platforms and partnerships at its developer forum, but the chipmaker’s foray into television came as a surprise. Bearing the title “America’s Greatest Makers,” the TV program will engage do-it-yourselfers who turn chips and other components into gadgets. Intel will team with Time Warner for the series, which will appear on TV and other media channels in 2016.
Kik Interactive, the Canadian startup behind a popular messaging app, has turned to China’s Tencent for a $50 million investment that values it at $1 billion. With more than 240 million registered users, Kik still has a long road to travel, facing stiff competition from the likes of Snapchat, WhatsApp and Facebook’s Messenger.
More than 17 years after the FDA approved Pfizer’s Viagra, the first drug to treat low sexual desire in women has won approval from U.S. health regulators. Addyi, produced by privately-held Sprout Pharmaceuticals, will only be available through certified health care professionals and pharmacies due to its safety issues. The drug can re
sult in potentially dangerous side effects such as low blood pressure and fainting, especially when taken with alcohol.
Hackers claiming to have stolen data from AshleyMadison.com, a website that facilitates hook-ups between would-be adulterers, have released information they say includes details of more than 36 million user accounts. The hackers posted full names, e-mail addresses, partial credit-card data and dating preferences on a site called infidelities-R-us.com. And for divorce lawyers, the Ashley Madison hack should be renamed the Full Employment Act of 2015. Already, reporters have discovered that the list includes about 15,000 military and government email accounts, plus more than 600 email accounts associated with banks.
Time once again to check out this week’s bank docket: JPMorgan is in advanced talks with the SEC to pay more than $150 million for steering clients to its own investment products without proper disclosures. Citigroup has agreed with the New York attorney general to return $4.5 million in management fees charged on some 15,000 frozen accounts, while BNY Mellon will shell out $15 million to settle several bribery cases. Apparently the bank was hiring relatives of foreign officials who managed a Middle Eastern sovereign wealth fund. Because really, what’s the point of having interns?