September 22, 2016

Stocks opened sharply higher this morning (Dow +112 pts; SPX +.5%). All eleven major market sectors are higher in early trading. Gold miners, transports, REITs, mid-caps and emerging markets stocks are up over 1%. Bloomberg is calling this a “Fed-Inspired Rally” because the FOMC yet again decided not to raise short-term interest rates. So the dollar is a bit weaker and commodities are higher. WTI crude oil is up to $46/barrel and copper is up 1.3% on the day. European markets are poised to close up 1-2% and Asia was higher overnight. Bonds are higher as yields fall today. The 5- and 10-year Treasury yields are back down to 1.16% and 1.62%, respectively. 

The Fed’s statement yesterday paradoxically noted improvements in the economy but said proof of sustainability was needed before they begin hiking rates again. They implied one small rate hike is still on the table for the fourth quarter, but scaled back expectations for hikes next year. The Fed has dual mandates to foster full employment (we’re basically there) and price stability (there’s not much inflation to speak of). And they’ve long said that monetary tightening will only be necessary if inflation enters a phase of sustained acceleration. 

The US Index of Leading Indicators (LEI) fell .2% in August from prior month levels due to lower readings for the factory workweek and ISM new orders. But while this seems to confirm a recent softening of the economy after a very strong June & July, it’s not that simple. Prior month (July) LEI readings were upwardly revised to a very strong .5% monthly gain. And on a year-over-year basis, LEI is still rising (+1.1%). Barron’s point out that “This report has been up and down all year, pointing on net to slow growth for the economy.”  

Existing home sales fell .9% in August to an annualized rate of 5.33 million units. So this represents a six-month low and the National Assn. of Realtors says high home prices and low for-sale inventory are to blame. Inventories are down 10% y/y and median home prices are up 5.1%. The good news is that by any longer-term measure the housing recovery is still in full swing. On a year-over-year basis, existing sales are up 7.3%. Accelerating wage growth and continued low mortgage rates are propping up housing. 

The Chicago Federal Reserve Bank’s National Activity Index fell to -.55 in August from +.24 in the prior month. All four major sub-components were lower: employment, industrial production, consumption, and sales & orders. In terms of magnitude, the dip in national business activity is fairly minor, but it does confirm a loss of economic momentum last month. 

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