The Big Wait


“To raise, or not to raise” – Anon

Next week’s column is apt to be a lengthy one, coming as it does in the aftermath of the Fed meeting, so this week’s commentary is going to be on the short side. Last week’s nice rebound in prices had mostly to do with technical moves, Fed speculation and a quiet news week for the economy.

Don’t expect much price action in front of the Fed report. Though some will surely try, for most it will hardly feel right to try to play hero in the last few days before a Fed meeting that has the investment community sharply divided and most of the financial world on edge. Over the weekend, even the Bank of International Settlement (BIS, the central bank for central banks) fretted over the potential effects of Fed tightening.

Longtime readers know that I avoid policy predictions, and for good reason. I can make a case for the Fed going either way, and anyway am in the camp that the Fed should have acted long ago. In any case, it isn’t a quarter-basis point move that will matter to the economy, but the perception that one cycle (easy money) will have ended and a tighter one begun, thus impacting the financial economy and eventually the real one. That doesn’t mean that an increase this week will necessarily cause markets to sell off, as traditionally they have instead rallied after the first couple of long-awaited increases. Predictions are all over the map, and while I would like to bet with history on this one (i.e., increase = stock market rally), I don’t feel confident of any outcome.

I do feel confident that the U.S. business cycle is near an end, though I am not so reckless as to pick the date or even quarter. The economy is a dynamic process, and while one as large as the U.S. does have a significant amount of inertia, some factors (e.g., policy decisions) can have the effect of either keeping the patient alive a bit longer or hastening the end. Death comes to us all, including bull markets, but picking the day is tricky. If I were an insurer, though, I would not be selling policies on the current cycle.

For me, the rate decision on Thursday means less to the economy than would any Fed plan to revive quantitative easing, or QE. By leaving rates at the zero bound for far too long in this cycle, the Fed is ill-placed to deal with any imminent downturn in the economy, as its own staff has pointed out in recent reports. That leaves QE as one of the only weapons in the toolkit, and I don’t know what the effect of such a revival would be in the current circumstances. My best guess is that it would matter little to the real economy, cause a lot of action in the financial one and in the end be a cause for regret. But the Fed has made mistakes before, and so has the stock market.

The Economic Beat

It was the turn of the quiet week again, the one that comes after the jobs report and before the one with the retail sales report and/or Fed meeting. The report that probably got the most attention last week was the labor turnover survey (JOLTS), with its oft-repeated tagline (I heard it several times on public radio) that job openings were at their highest level in fifteen years, which is how long the series has been around.

Though others surely reported it somewhere, not once did I hear that both the hire rate and hire level had actually declined. At 3.5%, the July 2015 hire rate was down from both June 2015 (3.7%) and July 2014 (3.6%). Those are seasonally adjusted, annualized numbers, but the decline was there from every angle, adjusted and unadjusted, absolute and rate-wise, serially (June-July) and year-on-year. Employment is a lagging indicator, so we can expect openings to expand even as the business cycle ends, and one month does not a trend make. But coming this late in the business cycle, the drop merits a lifted eyebrow. Openings are free, hires cost money.

Elsewhere in employment, claims remain on trend (very low) and the Fed’s Labor Market Conditions Index improved to 2.1 in August from an upwardly revised 1.8 in July. Consumer sentiment took a sharp drop, but that was probably due to the stock market.

The other data point that caught my eye was the wholesales report. Both sales and inventories were down, the latter affecting current quarterly GDP, though the former is ultimately more important. The numbers are initial estimates, but as it stands the growth rate for trailing-twelve-month (TTM) wholesale sales turned negative in July for the first time in five years. At 1.27, the inventory-to-sales ratio (SA) is far ahead of July 2014 (1.159), and that is going to mean more headwinds for sales. Part of the inventory build-up should be due to retailers stocking up early to head off any repeat of the port strike-induced shortfall of Christmas 2014, but that TTM sales figure can’t be so easily explained away. It’s been declining every month since March 2013.

August import-export prices caught the eye of many, with both categories falling more than expected. Import prices are down a whopping 11.4% year-on-year, with exports at minus 7%. Prices are down with or without energy, including finished goods, in both categories. Various explanations are proposed – strong dollar, imported Chinese deflation, falling energy prices – each with a bit of appeal, but one condition we can be sure is not responsible is that international trade is thriving. That ain’t happening. Producer prices are also down year-on-year (-0.8%) through August, though up 0.7% excluding food and energy.

Next week brings two big events, August retail sales (Tuesday, along with industrial production) and the biggest kahuna of them all, the Fed meeting and statement on Thursday that is this time around almost hysterically over-anticipated. It will come complete with press conference, offering bountiful further opportunities for high-frequency traders hanging on every word.

The Fed will have plenty of late-breaking, significant information to look at, including the New York Fed regional survey (Tuesday) and the Philadelphia Fed version on Thursday, the homebuilder sentiment index (Wednesday) and August housing starts (also Thursday). Presumably the FOMC (monetary policy committee) will have access to all of the reports – including the usual downgrades to the economic outlook from the Fed staff – when they begin deliberations Wednesday morning. To top off the momentous week, Friday is a quadruple expiration day (monthly plus quarterly options and futures), so expect lots and lots of volatility next week. Unless, of course, there are too many bets already on volatility.

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