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A Yawner From Yellen: Attention Now on Jobs Data After Speech Fails to Excite

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August 29, 2016

(Monday Pre-Market) Yellen delivered a yawner.

Friday’s speech by Fed Chair Janet Yellen, awaited all last week, turned out somewhat anti-climactic, providing no real insight into timing of the next rate hike. With the speech out of the way, it’s on toward the next big thing: Friday’s jobs report.

Yellen’s speech didn’t really tell the market much it didn’t already know, and stocks, which rose quickly right after Yellen’s comments appeared in headlines, fell back as trading continued. The general consensus is that Yellen stuck to the script, meaning she said the Fed will continue to watch the numbers as they come in. That’s what Yellen and other Fed speakers have said again and again in recent months, though some other Fed officials have sounded more hawkish in the last week or two.

Basically, Yellen said the economy is improving but inflation remains below the Fed’s target. She sees solid growth in household spending, but “soft” business investment and “subdued” foreign demand. On interest rate policy, specifically, she said: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

That wasn’t exactly a forecast for a rate hike, but it was a bit more of a hawkish tone. Yellen’s comments about the economy improving might have been her attempt to telegraph that the Fed may do something soon, and that could help explain why the futures market predicted a better chance for rate hikes in September and December immediately after Yellen spoke. Recently, futures predicted a 30% chance of a September rate hike, up from 18% earlier last week, and about a 60% chance of a rate hike in December, up from 48% earlier last week.

In a way, it’s starting to look like late May again, when the economy was improving and Fed speakers were sounding more hawkish. Back then, a summer rate hike seemed quite likely, but a poor May jobs report released in early June took the wind out of the market’s sails, and the Fed held off. The question is, will the data between now and the Fed’s next meeting Sept. 20-21 support a rate increase, or could another surprise like the May jobs report get in the way?

The difference this time is that the Fed’s September meeting occurs just weeks before the U.S. Presidential election. Although the Fed has raised rates during election seasons in the past, many analysts question if the Fed would do that this year, which may help explain why expectations for a hike are concentrated more in December.

Though the futures market is pricing in higher chances for a hike, the Treasury bond market remains subdued, with 10-year U.S. Treasury yields remaining below 1.6% as of midday Friday. The 10-year yield seems to have found a home between 1.5% and 1.6%, having now stayed in that range for most of the last few weeks.

While this coming Friday’s jobs data could give investors more insight into the consumer, there already was some data late last week that provided a look at consumer health. Friday’s second estimate from the government for Q2 Gross Domestic Product (GDP) came in around expectations at 1.1%, not much changed from the first estimate. But data deeper down in the report showed consumer spending rising 4.4% in Q2. A growth rate of over 4% is incredible in this kind of economy, and the question now is whether businesses will make similar investments in infrastructure and other areas. Many CEOs talked about this in their recent earnings calls, and if they do step up investment, it could end up being a good second half for the U.S. economy.

Other data last week, including housing numbers, revealed strength in the consumer. The consumer seems to be coming alive.

Looking ahead to next week, the jobs report is the “granddaddy” of all data, and that comes out Friday. Recent reports have shown average monthly job growth of about 190,000, with much of that concentrated in health care and business-to-business services. It would be good to see more growth in construction and manufacturing jobs.

This coming Wednesday is a day when investors might want to pay attention, with three Fed speakers scheduled. The market might be a little slow on Tuesday as people wait to hear what the Fed speakers have to say. Personal income on Monday is always an important number to watch, as well, as it may provide more vision into consumer health.

In general, trading could remain relatively slow through Labor Day, so investors might need to exercise caution. When the market is light in volume, things can move very quickly. Lately, volatility has been tough to predict.

S&P 500

FIGURE 1: A DIP AFTER YELLEN.

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim platform, took a dip in trading after Yellen’s speech Friday. Support is still down at around 2155. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Yellen Defends Fed's Stimulus Programs: Yellen didn’t have much to say about interest rates in Friday’s Jackson Hole speech, but she did spend some time defending the Fed’s asset purchase policy that it adopted soon after the 2007-2008 recession. Some critics have said the policy wasn’t effective but Yellen said the criticism “fails to consider the unusual headwinds the economy faced after the crisis. Those headwinds included substantial household and business deleveraging, unfavorable demand shocks from abroad, a period of contractionary fiscal policy, and unusually tight credit, especially for housing.”

Yellen added: “Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.” She also noted that the Fed could use up to $2 trillion in quantative easing to fight the next recession, if and when it occurs.

Cutting Back On Vacation Luxuries: It was another somewhat disappointing quarter for Tiffany (TIF), which reported quarterly revenue down 6% to $932 million as comparable sales fell across Europe, Asia, and the Americas. Earnings per share beat Wall Street estimates, however, and shares of the stock rose Thursday. In its press release, the company reported “challenges” in the global environment that have affected customer spending, in particular less spending by Chinese tourists. This was the third-consecutive quarter of falling comparable sales for the luxury retailer.

European Shares Beat U.S. Stocks Since Brexit Vote: It’s not just U.S. markets that recovered smartly after the late-June vote by Britain to leave the European Union. By the end of last week, the DAX index of 30 blue-chip German stocks was up 15% from its Brexit low, and the FTSE index of 100 companies listed on the London Stock Exchange was up nearly 15% from the depths of its post-Brexit struggles. In contrast, through midday Friday, the SPX is up just 9% from the lows it set immediately after Brexit. European stock markets closed mostly higher last week, gaining about 1%.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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