October 4, 2016

Stocks opened mixed this morning (Dow & SPX flat). Eight of eleven major sectors are lower in early trading. Utilities (-1.3%), real estate (-1.2%) and telecoms (-1.2%) are again the worst performing sector. The market is beginning to look like a two-trick pony, with financials and tech gaining momentum and everything else fading gradually. As with yesterday’s session, cyclical sectors are faring better than the defensives. European markets are poised to close higher and Asian markets were higher overnight. The dollar is stronger; WTI crude is hanging on to a modest gain at $48.95/barrel. Bonds are lower as yields move upward. The 5- and 10-year Treasury yields are back up to 1.21% and 1.65%, respectively. The 2-year Treasury yield is spiking as well (.82%), looking like it’s beginning to build in expectations for a Fed rate hike.   

Dollar strength this morning can probably be attributed to speeches by Fed Bank of Cleveland President Loretta Mester and Fed Bank of Richmond President Jeffrey Lacker. Mester said the economy is ready for a rate hike and the November Fed policy meeting could be “live” for a decision. Lacker said the Fed should be preemptive in raising rates because they need to get ahead of an expected rise in inflation. You may remember this is exactly the kind of jawboning we’ve heard constantly for over a year now, and yet traders still listen to them. Fed Chair Yellen is probably the one we need to listen to, and she hasn’t been that hawkish. 

Former Federal Reserve Bank of Minneapolis President Narayana Kocherlakota says he’s figured out why many Americans are dissatisfied with the economic recovery over the last several years.  In a Bloomberg column this morning, he shows a single chart measuring the percent change in US gross domestic product (GDP) from a decade earlier. In other words, he’s looking at long-term trends in the value of all the goods and services our country produces (adjusted for population growth & inflation). And he finds that the decade 2005–2015 was unusually weak. In fact, it was the weakest decade in the post-WWII period. The good news, however is that we’ve seen similar periods (1951-1961, 1973-1983) so he posits that this period of lackluster growth won’t last forever. But Mr. Kocherlakota has an interesting take on how monetary policy has contributed to weak growth. He says the Fed has actually been tightening monetary policy for about four years now and that has kept the lid on growth. He says, “the central bank is not pursuing a pro-growth agenda.” And then he takes it a step further: “we can’t have faster growth without a central bank that is a lot more willing to be supportive.” In case you missed that, his opinion is that the Federal Reserve hasn’t been nearly stimulative enough. 

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