Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why the Federal Reserve Will Move U.S. Interest Rates

Interest-Rates / US Interest Rates Feb 08, 2015 - 05:29 PM GMT

By: Money_Morning


Michael E. Lewitt writes: To say that markets are confused about when the Federal Reserve is going to raise interest rates is the understatement of the year.

The confusion is understandable. While the U.S. economy no longer needs crisis-era policies like zero interest rates and quantitative easing, the rest of the world is still struggling.

While some would argue that such policies are not the answer, central banks in Europe, Japan and China are doubling down on huge bond buying programs.

The question is whether the Federal Reserve will go its own way or allow weakness abroad to govern its next move…

What Federal Reserve Officials are Saying About a Move

A number of key Federal Reserve officials have been telling investors to keep their eyes on the ball at home. Mostly recently, St. Louis Fed President James Bullard told markets that they were ignoring warnings from the Fed that it planned to raise interest rates by the middle of the year unless economic data started weakening again.

This echoes the consistent message of Fed Chair Janet Yellen as well as that of her most important deputy, New York Fed Chair William Dudley.

The key data that the Fed is focusing on is jobs data and inflation data, both of which are holding steady.

The January jobs report, which was released Friday, was one of the strongest in months and included big upward revisions in the data for November and December. And while inflation remains lower than the Fed would like, this is almost exclusively due to the sharp drop in oil prices. Overall inflation is close to the Fed's target of 2% and would quickly hit that level if oil prices were to recover or wages start to increase. Accordingly, the Fed is quickly running out of excuses to delay raising rates beyond June.

The Bond Markets Read the Fed's Signals

Last week, markets seemed to pick up on that message. While stocks boomeranged all over the place and momentarily regained all of their 2015 losses before ending slightly in the red, bonds got pummeled.

Treasuries sold off four days in a row last week, their longest losing streak since last September. The iShares 20+ Year Treasury Bond ETF (TLT) dropped by a sharp 7.32 points or 5.3% on the week to close at $130.96, its lowest close since January 5.

The two-year Treasury yield, the most sensitive to the Fed's next move, saw its biggest one day jump since 2009, closing at 0.643% and signaling concern that the Fed could move sooner rather than later. After dropping from 2.173% to 1.669% from the beginning of the year through last Monday, its lowest level since May 2013, the benchmark 10-year Treasury yield spiked back up to close the week at 1.94%.

To keep this in global perspective, however, this yield still dwarfs those on 10-year German and Japanese bonds of 0.376% and 0.345%, suggesting that U.S. Treasuries are still much more attractive than foreign bonds and are unlikely to sell off much further.

In the bond futures pits, which provide the best real-time consensus on when the Fed will raise rates, traders increased their bets on a June rate hike from 14% on Thursday to 24% on Friday. Looking out further, futures traders were placing a 63% probability of the Fed raising rates by 50 basis points by September; a week ago the odds were under 50%.

For investors who had talked themselves into thinking that the Fed might sit out 2015, it was not a good week.

How the Government Numbers Support an Increase

If we look at the January jobs report, we can see that it is time for the Fed to let go and let the economy walk on its own two feet. Actually, that has been the case for a couple of years, but central bankers tend to be slow learners and markets have become spoiled by easy money. The U.S. produced 257,000 jobs in January, 267,000 of which came in the private sector. In addition, last year's jobs gains were revised upwards by 245,000 to 3,197,000.

Remarkably, last November shows the second biggest jobs increase of the 21st century with 423,000 new jobs added. The U.S. economy has now added an average of 336,000 new jobs over the last three months, an impressive showing by any measure.

There was also a 746,000 person increase in household employment and a huge 1.05 million increase in the size of the labor force, which led to an increase in the unemployment rate to 5.7% in January as the labor participation rate rose to 62.9%, off the lowest levels of the last 40 years.

U6, a broader measure that includes underemployed and underutilized workers, ticked up to 11.3%. Even better, after a 0.2% drop in hourly earnings in December, earnings rebounded by 0.5% month-over-month in January, the largest monthly gain since November 2008. This was partly due to higher minimum wage losses that went into effect in 21 states on January 1st.

Over the December-January period, wage growth was still sluggish but if the trend holds it could put upward pressure on inflation. This report may seems odd with mass layoffs occurring throughout the energy industry, but it for the moment it appears to increase the pressure on the Fed to hike rates sooner rather than later.

Equity Markets Are Less Certain

Stocks reacted calmly to the jobs report than the bond market after a volatile week of strong gains, spending most of Friday doing very little until seeing some profit taking late in the day. Stocks enjoyed a heroic week as oil prices rose by 7% to $51.69 per barrel, completing a 13% recovery over the past two weeks.

Stocks also ignored the unfolding Greek drama as Greece threatens Europe and Europe threatens Greece. Meanwhile, nobody talks about the fact that Greece is broke and can never repay its debts or survive economically inside the European Union unless Germany pays the bills forever.

On the week, the Dow Jones Industrial Average jumped by 659 points, or 3.8% to 17,824.29. The S&P 500 gained 3%, or 61 points, to 2055.47 and is now just 3 points shy of where it started the year. The Nasdaq Composite Index rose by 109 points or 2.4% to 4744.40.

A number of widely followed companies spiced up the week's earnings reports including Twitter Inc (NYSE: TWTR), whose stock soared by more than 16% on Friday after failing for once to disappoint investor and hedge fund favorite Gilead Sciences, Inc. (Nasdaq: GILD), whose stock dropped by 9.3% in the days after announcing terrific earnings and the payment of its first dividend after disclosing some pricing pressures on its franchise hepatitis-C drug. Other stocks like Alibaba Group Holding Ltd (NYSE: BABA) ($85.68 versus a high of $120.00) and Microsoft Corporation ($42.41 versus a high of $50.05) are well off recent highs after disappointing high investor expectations.

This is an extremely demanding stock market trading at historic valuations. It is also a stock market that is ignoring the negative economic signals being emitted by the commodity and bond markets. While the S&P 500 is trading at about 16x estimates for 2015 earnings, those earnings estimates are being steadily lowered based on the drop in oil prices and the negative effect of the strong dollar on corporate results.

Other measures that I cite often, including the S&P 500 Market Cap/GDP Ratio and the Shiller Cyclically Adjusted P/E Ratio, are also at all-time highs and far above their historical norms.

What applies to expensive stocks also applies to an expensive market: there is no margin for error and earnings misses are punished with sharp sell-offs.

Whether stocks can hold onto the gains they enjoyed last week remains to be seen particularly if sentiment builds that a Fed rate hike is imminent. Investors would do well to look for opportunities to hedge their positions…

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules