How To Stay One Step Ahead of the Fed Game

Lately there has been a trillion-dollar question on pretty much everyone’s minds: When are interest rates going to rise again and what will happen? In fact, Wall Street’s curiosity surrounding the Fed’s policies has evolved into an obsession as the central bank’s policies has driven more and more investors into the stock market. No one wants to be stuck holding the bag when rates finally rise again, so many have been frantically reading the tea leaves to figure out when this will happen.

In the recent FOMC minutes, Fed officials were overwhelmingly dovish and implied that the Fed would be slow to raise key interest rates. Meanwhile, market forces are causing Treasury yields to rise in anticipation of inflation. The three-year Treasury note recently crossed above 1% for the first time in three years. So even though the Fed is not explicitly acknowledging that inflation is brewing, fixed income investors fearing it are demanding higher interest rates. Both the Fed and economists are revising their interest rate forecasts slightly higher, but they seem to be reacting to market rates rather than truly forecasting where they are headed.

Here’s a little insight from an former analyst for the Fed: It pays to keep tabs on the economy. But with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So every Friday in this blog I hit the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines, including several indicators that should provide a sense of what the Fed will do next.:

Indicator # 1: Retail Sales

The Commerce Department announced on Tuesday that retail sales in June increased 0.2%, down slightly from May’s revised 0.5% advance. Economists were expecting a 0.6% jump. The lower-than-expected report can be attributed to a 0.3% decline in receipts at auto dealerships. While receipts at auto dealerships fell, the retail sales report was actually encouraging and showed that U.S. economy is strengthening. Excluding autos, gasoline, building materials and food services, core sales increased 0.6% last month. Sales at retailers jumped 0.8%, while sales at non-store retailers (including online) rose 0.9%.

Indicator # 2: Business Inventories

In May, U.S. business inventories climbed 0.5% to a seasonally adjusted $1.34 trillion. That was in-line with economists’ expectations. Sales jumped 0.4%. At the currents sales pace, it would take 1.28 months for current inventories to be used up, down slightly from Aprils’ 1.29. This was another solid report, as it shows that businesses restocking their shelves will continue to help boost U.S. economic growth.

Indicator # 3: Producer Price Index

The Producer Price Index climbed a seasonally adjusted 0.4% in June, which was up slightly from economists’ expectations for 0.3% and double May’s 0.2%. The increase in June was partially due to a 2.1% jump in energy prices. There is little doubt that inflation is now brewing, as the Federal Reserve’s preferred inflation measure, personal consumption expenditures price index, increased 1.8% in May, up from 1.6% in April. Still, the Fed expects inflation to remain under their 2% target this year.

Indicator # 4: Industrial Production

On Wednesday, the Federal Reserve reported that industrial production increased 0.2%. Economists’ were looking for a 0.4% jump. May’s industrial production was revised higher to 0.5%. Construction and materials increased 0.5% and 0.4%, respectively, in June. Capacity utilization remained unchanged at 79.1%. This represents the fourth increase in industrial production in five months. While it was a more modest rise than May’s and below economists’ expectations, it still shows an improvement in the U.S. economy.

Indicator # 5: Initial Claims for Unemployment

For the week ending July 12, unemployment claims dropped to 302,000. The previous week was revised slightly higher to 305,000 claims, up from the original 304,000. The four-week moving average dipped nearly 3,000 to 309,000. The labor market is definitely showing signs of improvement. We are now at the lowest level for unemployment claims since June 30, 2007.

Indicator # 6: Housing Starts and Building Permits

For the second month in a row, housing starts slipped due to a sharp decrease in June construction. Construction of new homes in June was a seasonally adjusted annual rate of 893,000, which was down 9.3% from May. New applications for building permits also dipped, falling 4% month-over-month. Single-family housing starts dropped 9% from May. These results were disappointing, as housing starts are now at the lowest level in nine months. The housing market continues to be a drag on the U.S. economy, but with the job market improving, we should soon see the housing market take a turn for the better.

The Big Picture: Index of Leading Economic Indicators

For the fifth-straight month, the leading economic indicators (LEI) index increased. For June, the index climbed 0.3% and the index’s gain for May was revised higher to 0.7%. Economists were looking for a 0.5% gain in June. Once again, this report shows that the U.S. economy continues to expand, albeit slowly.

Have a nice weekend,

Louis Navellier

Louis Navellier

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