June 17, 2016

The stock market continues to gyrate around close to all-time highs. This morning the Dow and SPX are down 68 pts & .4%, respectively. Energy is the only sector in the green as oil prices turn around. Semiconductors and biotechs are getting beaten up. Even utilities are falling. Interestingly, Asian stock markets closed up and European markets are poised to close up over 1%. The dollar is weaker and commodities are mostly higher. WTI crude is trading up around $47.50/barrel. Bonds are actually lower in price with yields a bit higher. The 5- and 10-year Treasury yields are up to 1.12% and 1.61%, respectively. 

Jim Bullard, one of the typically “hawkish” Federal Reserve bank presidents, has changed his tune. Prior to today, he has been consistent in calling for Fed interest rate hikes to deal with an expected increase in economic growth and inflation. But in a new “position paper” just released, he says US economic growth will remain tepid at 2% through 2018. In addition, he doesn’t believe inflation will rise above 2%. Therefore, he doesn’t see the need for more than 1 small rate hikes in the next couple of years. He doesn’t forecast a recession, but says the long-run outcome for the economy is uncertain. Further, Mr. Bullard seems to think the Fed’s forecasting model is somewhat broken and the US is in a new economic “regime” that requires a new forecasting approach. This view does correspond with recent comments by Fed Chair Janet Yellen: headwinds she thought were temporary are turning out to be more persistent. In addition, Mr. Bullard is validating Mohamed El-Erian’s comment (posted in this blog yesterday) that the Fed really doesn’t have a clear view of where the economy is going. 

Investors can be forgiven for throwing up their hands here. Only a month or two ago, the Fed had convinced Wall Street that the economy was improving to the point that more rate hikes were needed in the near-term.  And now Fed officials are nearly uniformly talking down the economy. Remember, this exact same Fed guidance cycle happened between December and February. So for the second time this year markets are getting whip-sawed by the inability to gauge the economy. This morning, CNBC is characterizing this saga as the “capitulation” of the Fed.

US housing starts edged lower in May to an annualized rate of 1.16 million units, but that’s a little better than expected. Even so, the pace of growth in home construction has plateaued. Starts are the about the same as they were a year ago. And yet, building permit volumes continue to rise. So growth in housing is moderating a bit but will continue to be additive to economic growth.    

In what has to be the most ironic story of the year, Chinese authorities have banned the iPhone 6 in the city of Beijing because they say it infringes on patents held by a Chinese competitor. Apple is appealing the ban. Bloomberg interviewed an analyst at BMO Capital who says this lower court ruling will likely be overturned by a higher court. Bloomberg notes, however, that Apple is under attack in China. Last month Apple lost the right to exclusively use the product name “iPhone.” A Beijing court ruled that a small purse maker can also use the name.  

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