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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (18826)	3/16/2017 12:24:07 PM
From: John Pitera	3 Recommendations Recommended By richardred roguedolphin The Ox Read Replies (2) \| Respond to of 33421

The United States1. As expected, the Federal Reserve hiked the Fed Funds rate by 25 bps. The markets also widely anticipated to see a boost in the FOMC’s rates, inflation, and possibly GDP growth forecasts. *Instead, the March predictions were nearly identical to what we saw in December.* Source: FRB Here is the historical “dot plot” for 2018, showing the same median Fed Funds rate the central bank published the last time. The forecasts for the end of 2017 and 2019 are pretty much unchanged as well. Source: Bloomberg Despite what we are hearing from the politicians these days, the Fed remains convinced that the “longer-run” US GDP growth will stay below 2%. Economists, including those at the Fed, *have a tough time seeing significant improvements in productivity and labor force growth to get to 3-4%.* The Fed is the only major central bank among the “developed” economies who’s last policy move was a rate hike. an endless sea of Central Banks whose last move has been to cut. And the FED has increased the FED Funds target 3 consecutive times... which triggers Edson Gould's 3 steps and a stumble in the stock market rule. Source: @charliebilello, @DeanDijour; Read full article 2. The unchanged projections were viewed as rather dovish – the FOMC is not itching to initiate rapid-fire rate hike cycle. The markets responded accordingly. • Treasuries rallied as the crowded trade we discussed yesterday got unwound (see #5 here). The 5yr yield fell 12bps – a significant 1-day move for Treasuries. The “belly” of the curve experienced a particularly strong rally. notice how the 5 and 7 year notes had the biggest decline in yield yesterday. • The dollar dropped, and stocks rose. • We also saw a sharp decline in real rates. Here is the 5yr Treasury Inflation-Protected Securities (TIPS) yield. As discussed before, lower real rates (and a lower dollar) boost precious metals prices. 3. The probability of three or more rate hikes this year (including the one we just had) declined. It's highly doubtful that we have 3 additional interest rate increases this year... I would be the chance of that occurring at 5 %. 4. The US CPI report came out on Wednesday as well, and it was roughly in line with forecasts. The core CPI remains range-bound. Here are a few other observations on the inflation data. • Services continue to dominate the CPI growth. • Inflation is not limited to rising shelter prices. • The index of the less volatile components of inflation, called “sticky CPI”, remains firmly above 2.5%. • Some notable price changes have been the declines in used car inflation, as well as fruits and vegetables. Electricity prices, on the other hand, started rising again (after about a year of declines). this can largely be attributed the advance in Natural Gas that occurred from Oct until January.... however Nat Gas prices have been trending lower the past 2 months. 5. US real wage growth has ground to a halt. The recent modest gains in nominal wages have been offset by higher inflation (above). 6. Despite stalled pay increases, retail sales remain solid. 7. Americans are also taking out more mortgages to buy homes as shown by the MBA Purchase Index. The borrowing activity, however, remains well below the “bubble” years. 8. Homebuilder optimism, on the other hand, hit the highest level since 2005 – the peak of the “bubble” years. The Homebuilders are a perennially optimistic bunch..... there do appear to be pockets of overbuilding occurring in parts of the US.... especially on the coasts.. At the same time Ultra high end US real estate prices have softened over the past 12 months. 9. Business sales have picked up significantly in the US (chart below), giving companies confidence to begin rebuilding inventories (second chart). 10. New York area manufacturing activity exceeded expectations. Here is the current orders index. 11. Below is a “heat map” of the latest “soft” and “hard” economic data. Source: Goldman Sachs, @joshdigga 12. The Fed’s model projections of the first-quarter GDP growth have completely diverged. The economists’ consensus is 2.2%. Here is the forecast from the Atlanta Fed (GDPNow = 0.9%) and the NY Fed (Nowcast = 3.2%). Source: Atlanta Fed Source: NY Fed Back to Index The United Kingdom1. The UK Phillips curve seems to be broken. Both the unemployment rate (which hit the lowest level in over a decade) and wages are moving lower. --------------------------- The Eurozone1. The Dutch elections exit polls suggest that the fears of Geert Wilders’ far-right Party of Freedom (PVV) making substantial gains were overblown. Source: @WSJGraphics; Read full article As Deutsche Bank points out, the support for PVV is correlated with the inflow of refugees. As the number of asylum seekers fell, so did the support for the party. Source: Deutsche Bank, @joshdigga 2. The combination of the dovish news from the Fed ( above) and the “benign” outcome of the Dutch elections sent the euro sharply higher. 3. Here is the latest survey of the German political scene. People seem to really like Schauble, the outspoken German finance minister. Source: Deutsche Bank, @joshdigga 4. Italian CPI continues to grind higher. With oil prices no longer rising, we should see the increases begin to moderate. Separately, Italians went on a massive shopping spree last month. Retail sales rose by the most in over a decade.