September 27, 2018

Stocks surged at the open (Dow +159 pts; SPX +.66%) following yesterday’s Federal Reserve interest rate hike. I don’t see any good reason for the rally and wouldn’t be surprised to see it selloff this afternoon. At the moment, ten of eleven major market sectors are in the green, led by the newly renamed Communications Services sector (+1.2%). Utilities are also rebounding 1% and the tech sector is up .7%. European markets are also broadly higher by about .5% although Asia was down overnight. After the Fed meeting (see below), the dollar shot up .6% vs. a basket of foreign currencies. That is putting a lid on commodity gains. Copper, gold, and iron ore are lower on the day. WTI crude oil, however, is back up over $72/barrel. Bonds are, not surprisingly, selling off. The 5-year and 10-year Treasury yields are back up around 2.96% and 3.07%, respectively.

The Federal Reserve’s Open Market Committee (FOMC) hiked its short-term policy interest rate by .25% yesterday (as expected). The accompanying statement made it clear that most Fed officials favor another hike before the end of the year, and several next year. The message is that economic growth and expected inflation are too strong to pause rate hikes. The FOMC statement also did away with language describing monetary policy as “accommodative,” meaning that the Fed has tightened monetary policy to the point where it is no longer stimulative to the economy. I suppose their policy stance can not be described as neutral. Fed officials made slight upgrades to economic growth this year and next, but they expect significant deceleration after that.

Durable goods orders surged 4.5% in August from prior month levels due to a temporary spike in civilian aircraft orders. Stripping out aircraft, business investment wasn’t nearly as strong. Corporate capital spending has been a hallmark of US economic resurgence over the last couple of years but a chink in the armor is now appearing. It’s nothing to be alarmed about yet because the level of investment is still strong, but the rate of growth is slowing. Year-over-year growth of new orders for capital goods excluding aircraft & defense equipment slowed down to 8% in August from 10% in the prior month. Bulls point out that 8% is very healthy, while bears point out that trade war escalation could dampen investment.

Pending home sales fell 2.5% in August from year-ago levels. The number of signed contracts has gradually decelerated from its early 2017 peak along with affordability levels. The average 30-year mortgage rate is up around 4.6% according to, and at the same time inventory of for-sale homes remains low. The National Association of Realtors (NAR) calls it a “slow drip downward.”

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