De Groote Financial Group October 30, 2015 No Comments

Federal Reserve Leaves Rates Unchanged… 

The central bank left short-term rates at zero, but specifically mentioned in their press release that they could raise rates as soon as December.

What it means – The Fed reminds of Wimpy from the cartoon Popeye. Wimpy is famous for saying, ” I will gladly pay you Tuesday for a hamburger today. Of course, next Tuesday never comes. This might not be the same thing, since this is the first time in this cycle the Fed explicitly mentioned a meeting when rates might change. But there’s a lot of time between now and the December meeting.The Fed remains data driven. Weak data implies no rate hike. Judging by the state of the global economy, we don’t expect anything but weak data, and therefore no change from the Fed in December.

U.S. Third-Quarter GDP Estimated at 1.5%… 

The headline estimate fell short of the 1.7% consensus. Health care costs drove the modest rise in personal consumption.
What it means – Many areas of the U.S. economy seemed to drive straight into a mud pit in the third quarter. They didn’t stop completely, but they definitely slowed down. This report showed muted numbers across the board, from personal consumption to net exports.

After the final numbers of 0.2% in the first quarter and 3.9% in the second, our growth rate so far this year is a whopping 1.87%. If fourth-quarter growth is 2.5% or less, then 2015 will go down as another year with GDP growth of 2.0% or less. Without faster growth, debt becomes a bigger burden and wages remain stagnant. In such an environment, it’s hard to see how the Fed will raise rates anytime soon, or, if they do rise by a token amount (0.15% to 0.25%), how they would push it any further in the months to come.

Durable Goods Orders Dropped 1.2% in September, Down 3.0% Year-Over-Year… 

Excluding transportation, orders fell 0.4% for the month and 5.3% over last year.
What it means – The hits just keep coming for the manufacturing sector. Not only was September ugly, but the numbers for August were revised lower. Non-defense capital spending excluding aircraft, a proxy for business investment, dropped 0.3% last month. This wouldn’t be so bad except it follows a 1.6% decline from August. The strong dollar bears some of the blame, since it makes our exports less competitive.

New Home Sales Unexpectedly Fell in September From 529,000 to 468,000… 

The markets expected a modest increase to 549,000. The disappointing number followed a downward revision to the August report.

What it means – The report had many people asking how such a big reversal occurred.New home sales are based on small sample sizes and then annualized, so a change of a few hundred units makes an exponential difference in the report.

S&P/Case-Shiller 20-City Home Price Index Up 5% Over Last Year… 

The price gauge has been steady at a 5% gain for almost all of 2015.

What it means – There’s still upward pressure on real estate prices, but how long can it last? The home ownership rate is the lowest it’s been in decades and wages remain stagnant. Tight supply kept prices on an upward trajectory, but if new home sales remain weak, it could be the end of the positive price trend. If prices do roll over – which they have not yet – then expect a lot of inventory to hit the market quickly. Owners considering selling won’t risk missing the market this time around.

Japanese Retail Sales Down 0.2% in September, Industrial Production Up 1.0%… 

The surprise drop in retail sales was partially offset by the gain in industrial production, although that measure is still down over last year.

What it means – The Japanese are trying to solve a puzzle. Are they in another recession, or not? This might fall into the category of useless debates. When your population is dying off, your central bank is printing currency to buy the government’s debt, and you haven’t seen the sunny side of inflation in a generation, does falling into the umpteenth recession really matter? The Bank of Japan might deny it, but eventually they will up their stimulus program, driving the yen further into the ground.

China Changes One-Child Policy to Two Children… 

The one-child restriction had big exemptions (rural areas, as well as urban areas with few children). Even so, the policy change shows the government understands the demographic challenges that lie ahead.

What it means – It just doesn’t matter. China will find that its citizens, just like those in South Korea, Japan, the U.S., and Europe, will delay having or simply not have children because they are so expensive in modern society. Without changing its home region policy or beefing up social payments for daycare and education, there’s no reason to expect that the average Chinese couple will suddenly want to grow their household.

U.S. Oil Imports Increased 500,000 Barrels Per Day This Year… 

Reflecting falling production in the U.S. and rising demand, foreign supply is filling the gap.

What it means – The first part of the Saudi strategy is working. In the face of falling prices, the kingdom expanded production, hoping to drive out high-priced new entrants like U.S. frackers. The domestic rig count fell from more than 1,600 last fall to just over 600, and several energy firms went bankrupt. The result is more foreign oil flowing into the U.S. So far, the second part of the strategy – curtail production to drive prices higher – hasn’t come to fruition. It’s not clear how long OPEC members can keep this up, but chances are a lot more U.S. firms will feel pain, as will the broad U.S. economy, before the Middle East oil producers become insolvent.

Doug De Groote, CFP®, MBA, CTC
Managing Director

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