E For Investors The Big Divergent Is Coming

Divergent, convergent or a bit of both? Analysts and investors appear to have crept up too close to the forest to see the trees. The talk this last year and a half that has been burning up the wires and airwaves centered around monetary policy and Federal Reserve speeches (Fed speak). We’ve fretted over the divergent policies of global monetary policy as the Federal Reserve went rogue and hiked rates a full one quarter of one percent while the European Central Bank and Bank of Japan went nearly nuclear option and cut rates into negative territory. Whoa! The markets shuttered while investors confused and fearful sold resulting in a -10%+ correction in US equities. The way we view this the Fed sensing the skittishness of investors and impact of the rate hike on the strengthening US greenback and in turn US exports put a cease and desist on their planned one percent of additional rate increases for the current year.  In fact it was that convergence of implied easing not priced into the markets that set off the 12%+ rally off those lows leaving market indices back into positive territory exiting the first quarter. We’ll get into the Feds real goal here later.  

Where We’re At:

Jobs - Non-Farm Payrolls gained +215,000 jobs. Importantly construction and healthcare added seventy four thousand jobs collectively which tend to be good payers. Hourly earnings ticked up +.03 while the participation rate inched up to 63%. This tick up in the participation rate suggests the strengthening labor market is pulling more people into the workforce. More work needs to be done here but the uptick is welcomed and long anticipated.

ISM Manufacturing-ISMM. ISMM as we anticipated in our March report continued its healing and moved back into expansionary mode clocking in +2.3% to +51.8%. There were signs of strength across the report. The New Orders Index snapped up +6.8% to +58.3%. The Prices Paid Index was up a whopping +13% to +51% largely due to the surge in energy prices. Of the Manufacturing Industries 67% reported growth. Commentary remains positive and potentially bullish.  Plastics and Rubber “ Hard to find workers and running lots of overtime”. Chemical Products “Business in telecom is booming”. Machinery “Requests for proposals for new equipment are very strong”. A few more months like this and we’ll likely see economists revising up estimates for US GDI and GDP. 

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Joe Economy 3 years ago Member's comment

Whatever the Fed does with rates it seems the consumer is unlikely to benefit in the long run. If they raise rates, bank interest rates will likely go up providing more income on savings, but the hike will most likely also increase the cost of borrowing money for a mortgage or car loan. There are many other factors at play here, but for Mr Average in the US, is a rate hike a good or bad thing? Any thoughts?

James Byrne 3 years ago Author's comment

Good day! Thanks for the response and interesting question. While the bump in borrowing costs may hit consumers in the wallet I believe on the whole the positive impact from higher interest rates for savers would far outweigh any negative impact from those higher borrowing costs. Keeping in mind any bump in borrowing costs is coming off of a historically and even generationally low base. Good question. Thanks.

Joe Economy 3 years ago Member's comment

Thanks for your reply. And if you were a betting man, would you wager that the Fed will hike interest rates in the next 6 months? I think they will continue to hike but very gradually.

James Byrne 3 years ago Author's comment

Good morning. I agree. I believe the Fed would prefer to "normalize" rates at a gradual pace so as not to inject unnecessary volatility into the market psyche. That gradual pace has been delayed even more so by the uncertainty of the global markets problems potentially washing up on our shores. While I'd prefer no tightening until later in the year when there are clear signs of stable growth in Europe and Asia, I believe the window to hiking rates closes the closer we get to the November elections. So I think the most likely event will be a June hike followed by a December move. Again, things have to fall in line and have to live up to the low bar we've all set. +2.5-+3% GDP growth. Inflation in the neighborhood of +2%. China stated growth of +6.5%. Japan and Eurozone steady +1.5% or better along with NO BREXIT. In the case of a BREXIT all bets are off. The Fed has already told us she's taking these factors into account which means a lot more moving parts which to me points to rates being lower for longer before we're even remotely close to "normalized" rates.

Thanks again.