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Thursday, September 24, 2015
Markets tumble on worries about rate hike by the Fed
Dow sank 256, decliners over advancers 5-1 & NAZ lost 76. The MLP index dropped 6+ to the 312s & the REIT index fell 1+ to the 303s. Junk bond funds mixed & Treasuries rose as stocks declined. Oil went up & gold shot up (going over 1150) as stocks were sold.
The Federal Reserve held interest rates near zero last week, though
13 of 17 policy makers still expect a rise this year. That forecast
faces a major threat: The concerns that persuaded officials to delay
action are just as likely to escalate over the next 3 months as to
die down. Financial market turmoil, slower global growth &
lingering doubt about the path of inflation led the central bank to
postpone its first rate rise since 2006. Those headwinds could
abate in time for officials to lift off at their meeting in either
Oct or Dec, but should they worsen, it may kill all hope of an
increase in 2015. Exhibit
A: There are several reasons why inflation might continue to languish
or even soften further before the end of the year, causing it to fall
short of the Fed’s already modest 0.4% 2015 estimate.
Declining
unemployment may fail to push up wages as the Fed expects because of
hidden slack in the labor market. Tumbling oil prices, while not
measured in core readings of inflation, could pass through to other
prices. And a stronger dollar could cool inflation further by dampening
the cost of imports. Though the Fed often cites the dollar &
commodity prices as headwinds that it views as transitory, they might
not be the only things contributing to subdued price pressures.
The momentum in orders for
business equipment stalled in Aug following gains the prior 2
months as. investment took a breather amid volatility in financial
markets & concerns that global growth is slowing. Bookings for
non-military capital goods excluding aircraft fell 0.2% after rising 2.1% in Jul, according to the Commerce
Dept. Orders for all durable goods, meant to last at least 3 years, dropped 2%
reflecting declines in defense & aircraft. The relatively steady
reading in capital goods bookings following the best back-to-back gains
in more than a year signals companies waiting to assess prospects for
US demand as global growth slows & financial markets turn volatile. A
strong American consumer, powered by more jobs, growing incomes & low
inflation, will be needed to help support the outlook for growth in H2. The forecast estimated
bookings for total durable goods would fall 2.3%. The Jul
reading was revised from a prior estimate showing a 2.2% gain. Shipments
of non-military capital goods excluding aircraft, which are used to
calculate GDP, decreased 0.2% after
rising 0.5% the month before. Commercial aircraft orders
dropped 5.9% after falling 8.7% a month earlier. Demand
for automobiles also took a breather, falling 1.6%. Bookings
rose 4.9% in Jul. Excluding transportation
equipment were little changed. Demand for defense
equipment dropped 24.3%, reversing the prior month’s gain. Stronger
investment in capital equipment would be a welcome boost for US
growth, which has relied on a solid pace of consumer spending this year.
Purchases of new homes jumped in Aug to a 7-year high as Americans took advantage of historically low mortgage rates. Sales climbed
5.7% to a 552K annualized pace, exceeding all forecasts & the highest since Feb 2008,
from a 522K rate in Jul that was stronger than initially reported, according to the
Commerce Dept. Steady
job gains & cheaper borrowing costs are bolstering demand for new
homes, particularly as the supply of previously owned properties is
still scant. Further healing in residential real estate should help
underpin the US economy amid weakness from the stronger dollar &
slower overseas growth. The forecast called for 515K & the Jul reading was previously reported as
507K. The median sales price increased 0.3% from Aug 2014 to $292K. Purchases
climbed in 3 of 4 US regions, led by a 24.1% jump in
the Northeast. New-home
purchases, tabulated when contracts get signed, are considered a
timelier barometer of the residential market than purchases of
previously owned dwellings.
Stocks are spooked again, another sign that this is not a healthy market. Janet will be testifying shortly & traders worry about what she might say about a rate hike. They should wake up & realize that a hike is long overdue (I remember their worries in 2013). It will probably come this year & should be a modest 25 basis points followed by a pause for at least 1-2 meetings. This much nervousness about a long overdue rate hike is a sad state of affairs for the stock market.
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