Looks like the Fed overshot again with rate hikes

As I wrote Wednesday morning prior to Fed chief Jay Powell’s announcement of standing pat on Fed funds rate.

Stocks and the gold price took off on the news that the Fed statement took all the language out of their plan to look at raising rates, due to recessionary fears. The Fed is currently at 2.5% on the rate.

What does this mean? Well appears that Powell & Co. may have overshot — once again — restraining lending too much and may put the US economy into negative reading on growth.

As I wrote at the time, the December rate hike was not needed since the Fed had already taken much of the air out of the economy through pricking the asset bubble in stocks.

Now due to the government shutdown we will not get our first reading of fourth quarter growth, which would normally be out Thursday, until later on in the month. However the Fed probably had a good read on that GDP number, which is probably below 2% growth.

 

Advertisements

Fed can’t find inflation, but let’s raise rates to help the banks

The Federal Reserve — headed now by Jay Powell — released the minutes from the last meeting in March. The Fed is feeling that inflation, which has been under 2% annually for many years, is about to grow.

There is little evidence of inflation, but the Fed says that since Trump’s tax cuts gave thousands of workers a bonus and the raising of minimum wage, inflation will come and the Fed should continue raising rates. Continue reading

Trump “strong” arms Yellen & Co.

President Donald Trump fired his opening salvo across The Federal Reserve’s bow by saying Wednesday night that the dollar was getting too strong and interest rates should not get much higher.

Fed chief Janet Yellen and her fellow governors have been jawboning for at least three rate hikes in 2017.

“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately,” the President told the Wall Street Journal. “Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good.”

The trouble with King Dollar policy, which says a strong dollar is ultimately good for the US economy, is no longer meaning that the US has a strong economy.

Dollar strength is a by-product of currency manipulation by other nations by devaluing their currency. It’s all laid out in Jim Rickards’ “Currency Wars” book.

As the President said, “It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.”

I believe that the best barometer of the US economy is the 10-year Treasury rate plotted against the Gross Domestic Product. That ratio should be close to 1.

As we have seen over the last month, the 10-year has moved from 2.6% to 2.2%, which is still too high as 2017 Q1 GDP estimates are 0.6% according to the Atlanta Fed’s GDPNow forecast. The first look at Q1 GDP will come out at the end of the month.

The divide between these two measures must correct itself in the short-term, which means bond yields must come down since GDP will not soar as the US consumer has pulled back spending. That spending accounts for nearly 70% of GDP.

As Yellen tenure as Fed chief is about to expire, Trump’s words on rate rises should get the central banker’s attention. As I have written in January, the Fed will have a “one and done” rate rise in 2017, unless the White House can get its tax-cut policy enacted.

Retail woes spread across all price points

Because of yesterday’s monumental news the Richmond Fed President Jeffrey Lacker immediately resigned for leaking Fed information before it was released, I did not write on two huge developments in US retailing that point to the troubling economy.

Ralph Lauren — the iconic US retailer — is closing its flagship Manhattan store on 5th Avenue and Payless Shoes — the large discount shoe chain declared bankruptcy.

The two firms, which are on polar opposites of the retail space, shows how systemic the problems are in retail and by extension commercial real estate.

Both the aspirational shopper and the bargain hunter have pulled up stakes and pulled back their spending forcing Macy’s, JCPenney, Nordstrom’s, Sears/KMart and others to close many stores and look at changing their business models.

This is a key component to why the Gross Domestic Product is mired in a depressed level of sub-2%, since consumer spending accounts for roughly 70% of the important economic number.

Let’s also remember that many large retail operators are owned by private equity firms, which levered the business with plenty of debt to take their profits upfront, that is coming due is spurring the rash of bankruptcy filings.

To put a finer point on the retail woes. L Brands the maker of Victoria’s Secret just said Thursday morning its overall sales for March sales were down 10% year over year; and sales at Victoria’s Secret were down 13% for the same period.

So if sexy is not selling what does that portend for expensive sports clothes and cheap shoes?

Ides of March trifecta may bring more change

Wednesday — the Ides Of March — is the a day of reckoning times three.

As I wrote earlier the Fed is concluding its two-day meeting on whether to raise rates. Although I am alone in this camp, I still believe Yellen & Co. will see many aspects of the economy that would greenlight a rate raise, there will be a continuation on the pause.

Despite what the bond market is saying with yields rising in anticipation of the hike, the Fed will cite falling GDP along with inflation slowing — due to falling energy prices.

I believe if you look at retail sector as the canary in the coalmine with growing bankruptcies and mall closures, must be on the radar of the regional Fed presidents and governors.

Wednesday also brings a hard stop on debt ceiling. This means Treasury cannot issue more debt unless it pays off earlier-issued debt paper.

Congress needs to approve a measure to raise the debt ceiling. The government does still have cash to operate for a few months, so there will not be an imminent shut down, but it does take some of the wind out of the sails of what the Trump administration can do in the short-term.

Lastly on March 15th the Dutch go to the polls to vote for Prime Minister. The anti-Euro candidate Geert Wilders, who leads the populist newish movement called the  Party of Freedom, was the leader according to media in the Netherlands. Now Wilders, with his shock of dyed yellow hair, is said to be behind a more traditional socialist candidate. (Now where have I seen this before?)

Wilders is the equivalent of Brexit and Trump. He has run on a nationalist program with an anti-immigration focus, like the other populist movements of 2016.

And just like Trump and Brexit, the local media is saying Wilders is not going to win, so that tells me he should win handily.