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Yellen Mum on Policy, So Focus Shifts To Approaching Jobs, Inflation, GDP Data

August 28, 2017

(Monday Pre-Market) Fed Chair Janet Yellen usually delivers when investors expect her to address monetary policy and the economy. But Friday at Jackson Hole, she uncharacteristically refrained from any remarks on those topics, so the coming week’s data — including August payrolls — might give investors better insight into the economic picture.

Yellen’s decision not to address interest rates or balance sheet tapering left many investors scratching their heads, and ultimately, didn’t seem to have much effect on the stock market. Equity values first fell after her speech, and then started to rise. As of midday Friday, the S&P 500 (SPX) remained in the middle of its recent range after a week of unsettled trading without much direction either way.

Anyone looking for direction might be better off checking 10-year Treasury bond yields, which turned south again after Yellen spoke. Earlier in the day they’d flirted with 2.20%, but later they headed back down toward 2.17% and weren’t too far above their post-election lows of 2.12% seen in June. Yellen’s decision not to address monetary policy in her remarks, accompanied by Dallas Fed President Robert Kaplan indicating he thinks the Fed can be patient about additional rate hikes, might have combined to weigh on yields.

The dollar also fell against the pound and the euro after Yellen's speech and the dollar index slipped back below 93 toward the lowest levels of the year. All this doesn’t exactly sound like an environment where investors would expect hawkish monetary policy, and the futures market reflects that. Odds of a rate hike by the end of the year remained below 40% as of midday Friday, according to CME Group futures.

The same futures market gives about 99% odds of rates remaining unchanged in September, so the remaining question is when the Fed might begin addressing its balance sheet. It’s not the answer many investors may want to hear, but a lot could depend on the data. That’s definitely been the Fed’s refrain recently, and a lot of numbers roll down the pike over the next few days ahead of Labor Day weekend.

The key data besides PCE prices (see below) is this coming Friday’s August payrolls report, which seems to be coming right on the heels of the last one, perhaps because this time it hits the wire on the very first day of the new month. The economy saw 209,000 new jobs created in July and 231,000 in June. Monthly jobs growth has topped 200,000 in five of the last seven months, but monthly wage growth has been sort of tepid between 0.1% and 0.3% for most of the year. That's kind of a conundrum because frequently strong jobs growth results in higher wages and inflation. 

It’s questionable if the economy can deliver a third-consecutive month of jobs growth above 200,000, which last occurred in late 2015. Even if growth comes in around 175,000 or 180,000, however, that looks like more than enough to keep the unemployment rate at its current low level.

Another important data benchmark this coming week is the government’s second estimate of Q2 gross domestic product on Wednesday. The first estimate was 2.6%, up from just 1.2% in Q1.

Though the week is big on data, earnings slow to a crawl. Best Buy (BBY) on Tuesday and Dollar General (DG) on Thursday are worth watching for more insight into the retail sector. Speaking of retail, Monday is the day when Amazon (AMZN) finalizes its purchase of Whole Foods (WFM). AMZN plans lower prices at the supermarket chain, which could set off an interesting challenge for competing grocery companies. We’ll see how it plays out in the markets.

Away from Wall Street, investors could be watching the aftermath of Hurricane Harvey. Major winds and flooding in Texas continue to keep oil production facilities and gasoline refineries shut down, but any impact on oil and gas prices is likely to be temporary, if past storms offer any hint. Watch energy, airline, and insurance stocks in the days ahead for any possible storm effect.

Congress remains out of town, but returns after the Labor Day holiday and has a lot on its plate. We’ll see if representatives, senators and the president can get together on budget and debt ceiling matters in coming weeks, and if there’s any progress on long-promised tax reform.

From a technical perspective, the SPX recovered after testing support near 2420 early last week, but appeared to be bumping up against resistance near 2450 by late Friday. It might seem like the market’s on the defensive, but keep in mind that the SPX isn’t far from recent all-time highs.

S&P 500


The S&P 500 (SPX), tracked here over the last week, seems to be finding technical resistance at around the 2450 level, but did bounce off lows near 2420 a week ago. Nasdaq (COMP), represented by the purple line is closely tracking the SPX. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Inflation Update Ahead: The Fed is struggling to get a handle on continued light inflation, according to minutes from its last meeting. This coming Thursday the Fed and investors get a new batch of inflation numbers, this time from what’s said to be the Fed’s most favored indicator. Personal Consumption Expenditure (PCE) inflation for July bows before the open that day, and we’ll see if the PCE data look any different from the consumer and producer price data for the same month that came out recently and showed little sign of an uptick. The PCE price index was up just 1.4% year-over-year in June, down from 1.5% growth in May. Core PCE inflation was barely any higher. This will be the Fed’s last look at PCE data before members gather for their September meeting.

The Future of Yellen: After Yellen’s speech in Jackson Hole Friday in which she strongly defended banking industry regulations enacted after the 2008 financial crisis, new questions loom about whether President Trump will reappoint her as Fed chair when her term expires in February. Trump has complained about the banking regulations and ran his campaign in part on promises to pull back regulatory restraints on business. There’s also talk in the financial media that Trump might be considering his top economic advisor, Gary Cohn, for the role of Fed chair. When asked by a congressmen last month if she thought her testimony to Congress might be her last, Yellen replied, “"My term expires in February, and so it may well be. I have not said anything about that. I intend to serve out my term." However, even if Yellen leaves her post, she won’t necessarily be leaving the Fed. Her term as a member of the Fed’s board doesn’t expire until 2024.

More to the Picture: Data last week mostly looked disappointing, with new home sales, existing home sales, and durable goods orders all coming in below analysts’ expectations. However, headline numbers can sometimes mislead, and that might be the case with durable orders. As pointed out, the key category of nondefense capital goods excluding aircraft orders actually rose 0.4% in July, while shipments in that category rose 1%. This might represent positive growth news for manufacturing early in Q3.

Good Trading,

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