Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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