Monday Morning Minute 031317
THE WEEK AHEAD
The FOMC meets this week and is expected to deliver a rate increase. Wednesday’s announcement will be associated with a summary of economic projections and a press conference by the Chair.
The return on cash hasn’t been much to write home about recently. As the economy picks up, expectations for short-term interest rates are perking up (graph below). A year ago, markets were pricing in an expectation for a 1.2% short-term interest rate by early 2019. Today, that same expectation is near 1.9%. As assumed cash returns rise, they compete against returns available on other assets.
The Federal Reserve’s Federal Open Market Committee (FOMC) meets again this week. A rate increase seems justified given the current degree of accommodation, increasing price pressures, and strong employment readings. Headline inflation is up 2.5% year over year, above the Fed’s 2% target rate, for example, while the 4.7% February unemployment rate is now below the Fed’s assumed “full employment” level. Even average hourly earnings are accelerating and likely to near a 2.5% pace in the first quarter.
At a speech on March 3 before the Executive Club of Chicago, Fed Chair Janet Yellen reminded us that Fed policy is still accommodative. Consider that:
1) Real interest rates are near -1%, well below the Fed’s assumed neutral rate of +1%, and
2) Monthly employment growth is near 180,000 net new jobs, which is much higher than monthly labor force growth (75,000 – 125,000).
Less accommodative monetary policy also comes amid shifting expectations for fiscal policy, complicating matters. With slack in the economy abating, and potential for a fiscal thrust on the horizon, the job of the central bank is further complicated. After a long period of ultra-low interest rates, the pace of increases is clearly picking up along with the economy.
ECONOMIC RELEASES THIS WEEK
|Monday, Mar 13:||Labor Market Conditions Index||Feb||—||1.3|
|Tuesday, Mar 14:||FOMC Meeting Begins|
|PPI Final Demand M/M||Feb||0.1%||0.6%|
|PPI Ex Food and Energy M/M||Feb||0.2%||0.4%|
|PPI Ex Food, Energy, Trade M/M||Feb||—||0.2%|
|PPI Final Demand Y/Y||Feb||1.9%||1.6%|
|PPI Ex Food and Energy Y/Y||Feb||1.5%||1.2%|
|PPI Ex Food, Energy, Trade Y/Y||Feb||—||1.6%|
|Wednesday, Mar 15:||FOMC Meeting Ends|
|CPI Ex Food and Energy M/M||Feb||0.2%||0.3%|
|CPI Ex Food and Energy Y/Y||Feb||2.2%||2.3%|
|Retail Sales M/M||Feb||-0.1%||0.4%|
|Retail Sales Ex Auto M/M||Feb||0.1%||0.8%|
|Retail Sales Ex Auto and Gas M/M||Feb||—||0.7%|
|Empire State Manf. Survey||Mar||15.0||18.7|
|NAHB Housing Market Index||Mar||65||65|
|Foreign Demand for Long-Term U.S. Securities||Jan||—||-$12.9 B|
|Thursday, Mar 16:||Weekly Jobless Claims||Mar 11||—||243 K|
|Housing Starts M/M||Feb||1.1%||-2.6%|
|Philadelphia Fed Business Survey||Mar||26.5||43.3|
|Friday, Mar 17:||Industrial Production M/M||Feb||0.2%||-0.3%|
ASSET ALLOCATION PORTFOLIO POSTURE
Based on shorter-term expectations, the “tactical” allocation within portfolios is underweight bonds / overweight stocks.
Kevin Caron, CFA®, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst Suzanne Ashley, Analyst
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
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