Fed Doubts Grow on 2015 Rate Hike

Weakness in retail sales, inflation data raises concerns about economic Outlook

By Jon Hilsenrath and Anna Louie Sussman

 Fed chief Janet Yellen, shown after the central bank’s September meeting, has said she expects to raise interest rates this year but has also shown sympathy with policy makers who are concerned about recent soft data.

Fed chief Janet Yellen, shown after the central bank’s September meeting, has said she expects to raise interest rates this year but has also shown sympathy with policy makers who are concerned about recent soft data. Photo: Andrew Harrer/Bloomberg News

The chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity, a disappointing development for central bank officials who have been hoping to move this year after a prolonged period of easy-money policies.

Lackluster readings on consumer spending, inflation and jobs have virtually eliminated the chances of a move this month. Already, two Fed governors expressed doubts this week about whether the timing will be right this year, and the recent trove of data hasn’t reassured top officials about the economic outlook.

The Commerce Department on Wednesday reported seasonally adjusted retail sales rose just 0.1% in September, and actually fell from August’s levels once car sales were stripped out. The Labor Department also reported producer prices—an indication of inflation at the wholesale level—fell 0.5% in September and were down 1.1% from a year earlier, the largest 12-month decline during this expansion.

The Fed has two scheduled policy meetings left this year, in late October and mid-December. Futures-markets traders now see almost no chance of a rate increase this month and a 1-in-3 probability of a move by year-end.

Fed officials have long said the timing of the first rate increase would be dependent on incoming economic data. Consumer price inflation has been running below the Fed’s 2% objective for more than three years, and policy makers want to be confident inflation is heading back up before they start lifting rates. Consumer spending makes up about two-thirds of total demand for goods and services produced in the U.S, and retail sales are an important indicator of the economy’s underlying vigor.

While an October move is highly unlikely, the Fed could still decide to push rates up this year, particularly if the labor market shows renewed signs of vigor before its Dec. 15-16 policy meeting, or if signs emerge that wages or inflation are moving up from low levels.

Still, the soft retail and inflation reports won’t inspire much confidence among Fed officials, especially a couple of weeks after the Labor Department reported the pace of hiring slowed in September and was weaker than first thought in July and August. U.S. exports are also now on track to decline this year for the first time since the recession.

The central bank pushed short-term interest rates to near zero in December 2008 and has kept them there ever since in an effort to boost borrowing, spending and investment. Officials came into the year thinking the economy was finally strong enough for a modest rate increase, but they have been serially disappointed about growth and in turn have delayed moving on rate increases. Early in the year, many officials believed they would have raised rates by June.

Fed officials have given up on expectations that growth would accelerate in 2015, as they hoped would happen at the beginning of the year. Their hope now is that a healthy domestic economy can withstand slowing overseas economies and turbulent financial markets and keep growing at a fast enough pace to modestly reduce unemployment further.

Some officials have signaled unease in the past few days with the central bank’s projection that rates would be raised this year. At their September policy meeting, when the Fed delayed a rate increase because of worries about overseas and market turbulence, 13 of 17 Fed officials said they still expected to move before year-end. Fed Chairwoman Janet Yellen has since said she was among those 13.

Ms. Yellen and others have blamed weak inflation on temporary factors, including depressed energy and import prices and they expect to see those influences wane.

Two Fed governors this week signaled unease not only about the economic outlook, but also with the framework Ms. Yellen has laid out for why rates should rise. The chairwoman has said she expects slack in the economy to diminish as the unemployment rate falls, a precursor to inflation down the road.

The governors, Lael Brainard and Daniel Tarullo, said falling unemployment isn’t a great indicator of future inflation and thus not a sound basis for raising rates. Ms. Yellen herself, in a speech in Amherst, Mass., last month, expressed sympathy with their skepticism, a sign of anxiety at the highest levels of the Fed about the decision.

Ms. Brainard, in a speech earlier this week, said the central bank should take a stance of “waiting to see if the risks to the outlook diminish.” Mr. Tarullo echoed that view Tuesday in an interview on CNBC, saying “right now my expectation is—given where I think the economy would go—I wouldn’t expect it would be appropriate to raise rates” this year.

The comments by the Washington-based governors also reflect internal divisions; they were striking back at regional Fed bank presidents, who tend to speak out more frequently and have been among the most outspoken advocates for rate increases this year.

“Real interest rates need to be higher than they are now,” Richmond Fed President Jeffrey Lacker told Fox Business Wednesday.

Ms. Yellen—in the position of having to balance these competing internal views—has repeatedly said the Fed’s expectations for the economy will be based on the incoming data, but recent reports suggest the data aren’t cooperating.

In September, the Fed cited weak growth abroad for its decision to delay a rate increase. China, Indonesia, Germany, Singapore and the U.K. this week have all reported different signs of weakening inflation or demand.

In U.S. futures markets, traders put just a 2.3% probability on a Fed rate increase at the Oct. 27-28 policy meeting, according to the Chicago Mercantile Exchange. They put a 33% chance on a move in December.

This could turn with a new batch of stronger economic data. A few bright spots held in the retail-sales report: U.S. consumers shelled out 0.9% more on clothing and accessories in September than they did in August, and spent 0.7% more at restaurants and bars than the prior month. And auto sales were up 1.8% in September from August. Excluding gasoline, sales were up 4.9% in September, in line with the pace of the past two years.

A survey of businesses known as the beige book released by the Fed on Wednesday said “business contacts across the nation were generally optimistic about the near-term outlook.”

Scott Wise, president and chief executive of Scotty’s Brewhouse, a chain of roughly a dozen sports bars in Indiana, said business at his locations is up anywhere from 5% to 15% from the previous year.

Recent turmoil in financial markets and slowing job gains haven’t yet made their impact felt, he said.

“You’re not going to see a direct correlation between ‘Oh my god, the stock market is down 500 points’ and ‘We’re not going out to dinner tonight,’ ” he said. “You’d have to see something more sustained before people start to tighten up a bit.”

But comments from some Fed officials in recent days show that at this point the central bank will need more convincing if it is to move rates up this year.

“The softness of September’s retail sales figures supports our view that the Fed probably isn’t going to hike interest rates until early next year,” said Paul Ashworth, chief U.S. economist at Capital Economics.

The Federal Reserve Bank of Atlanta estimates the economy expanded at an anemic annual rate of 0.9% in the third quarter. Fed officials have been expecting headwinds from overseas to weigh on exports, but they are expecting vigor in the domestic economy to outweigh those forces and keep the expansion going at a modest pace that keeps reducing unemployment. The jobless rate was 5.1% in October.

Governments’ Self-Disruption Challenge

Mohamed A. El-Erian Raspberry Pi 

LAGUNA BEACH – One of the most difficult challenges facing Western governments today is to enable and channel the transformative – and, for individuals and companies, self-empowering – forces of technological innovation. They will not succeed unless they become more open to creative destruction, allowing not only tools and procedures, but also mindsets, to be revamped and upgraded. The longer it takes them to meet this challenge, the bigger the lost opportunities for current and future generations.
Self-empowering technological innovation is all around us, affecting a growing number of people, sectors, and activities worldwide. Through an ever-increasing number of platforms, it is now easier than ever for households and corporations to access and engage in an expanding range of activities – from urban transportation to accommodation, entertainment, and media.
Even the regulation-reinforced, fortress-like walls that have traditionally surrounded finance and medicine are being eroded.
This historic transformation will continue to gain momentum as it expands in both scale and scope.
But its benefits will not be fully realized unless governments take steps to empower the forces of change, ensure that the massive positive externalities are internalized, and minimize the negative impacts. Unfortunately, this is proving extremely difficult for many advanced-country governments, partly because the failure to recover fully from the recent crisis and recession has undermined their credibility and functioning.
The emergence of anti-establishment and non-traditional political parties and candidates on both sides of the Atlantic is complicating even the most basic elements of economic governance, such as enactment of an active budget in the United States. In this context, taking the steps needed to upgrade economic systems, including infrastructure in the US and the incomplete union in Europe, or to meet historical challenges like the refugee crisis, seems all but impossible.
In fact, Western political and economic structures are, in some ways, specifically designed to resist deep and rapid change, if only to prevent temporary and reversible fluctuations from having an undue influence on underlying systems. This works well when politics and economies are operating in cyclical mode, as they usually have been in the West. But when major structural and secular challenges arise, as is the case today, the advanced countries’ institutional architecture acts as a major obstacle to effective action.
The political influence of financial donors and lobby groups add to the challenge. Rather than promoting actions aimed at improving the long-term wellbeing of the system as a whole, these actors tend to push micro objectives, some of which help the traditional, often wealthy elements of the establishment maintain their grip on the system. In doing so, they block the small and emerging players that are so vital to upgrading and transformation.
All of this serves to complicate an imperative that is relevant not just to governments, but also to companies and individuals that must adapt to changing circumstances by upgrading their structures, procedures, skills, and mindsets. Few are eager to self-disrupt, a process that takes us out of our comfort zone, forcing us to confront our long-standing blind spots and unconscious biases and adopt a new mindset. But those who wait until the disruptions are unavoidable – easy to do when governments do not mount a timely response – will miss out on the huge advantages that technology offers.
Even when governments decide to implement policies that enable economic upgrading and adaptation, they cannot do so in isolation. With technology enabling unprecedented mobility and connectivity, the jurisdictional power of nation-states is being eroded, meaning that a truly effective response – one that unleashes the full benefits of disruptive technologies – is impossible without multilateral cooperation and coordination.
But multilateralism is undergoing a transformation of its own, driven by doubts about the legitimacy of existing structures. With reforms of the traditionally Western-dominated institutions having stalled, there have been moves to create alternatives; China’s Asian Infrastructure Investment Bank, for example, competes directly with the World Bank and the Asian Development Bank in some areas. All of this makes global-level responses more difficult.
Against this background, a rapid and comprehensive transformation is clearly not feasible. (In fact, it may not even be desirable, given the possibility of collateral damage and unintended consequences.) The best option for Western governments is thus to pursue gradual change, propelled by a variety of adaptive instruments, which would reach a critical mass over time.
Such tools include well-designed public-private partnerships, especially when it comes to modernizing infrastructure; disruptive outside advisers – selected not for what they think, but for how they think – in the government decision-making process; mechanisms to strengthen inter-agency coordination so that it enhances, rather than retards, policy responsiveness; and broader cross-border private-sector linkages to enhance multilateral coordination.
How economies function is changing, as relative power shifts from established, centralized forces toward those that respond to the unprecedented empowerment of individuals. If governments are to overcome the challenges they face and maximize the benefits of this shift for their societies, they need to be a lot more open to self-disruption. Otherwise, the transformative forces will leave them and their citizens behind.

Gold: The Road Signs Point To $1250

By: Stewart Thomson

Graceland Updates 4am-7am

  1. Is the US dollar still the most important safe haven for fiat enthusiasts?
  2. For the possible answer, please click here now. That's the US dollar versus Japanese yen daily chart. The dollar collapsed in August, as global stock markets suffered a meltdown!
  3. Simply put, the yen acted as a safe haven during the stock market crash, and the dollar acted as a "risk on" asset. The dollar is now trading in a fairly large symmetrical triangle pattern, after breaking a key uptrend line.
  4. A bearish double top pattern also appears to be in play.
  5. Many large FOREX traders like to buy gold when the dollar falls against the yen. On that note, please click here now. That's the daily gold chart, and it looks excellent.
  6. A full downside breakout would have targeted the $1000 area, but it didn't happen. Instead, the move was to the upside. From here, a pullback to the $1130 area is easily possible, given the substantial rally that has occurred.
  7. That would put gold roughly at the apex of the beautiful triangle pattern. Please click here now. That's a snapshot of the latest COT report. The banks are shorting some gold into this rally. Since the release of that report, gold has rallied again, and the banks have likely added a lot more short positions.
  8. Rather than waste energy trying to determine if the $1070 area is some sort of "ultimate low", amateur gold investors need to calmly book some light profits into this decent rally, while cheering for higher prices!
  9. From the apex area, a surge to my technical target area of $1250 seems quite attainable, given the fundamental background of weak global equity markets, the PBOC's new gold buy program, and surging demand in India.
  10. Please click here now. Double-click to enlarge. I predicted that the Shanghai Gold Exchange would not launch its gold price fix until late in 2015, and Reuters is suggesting that a new SGE chairman may be appointed very soon.
  11. It appears that the SGE gold fix is roughly on schedule. That's phenomenal news for all gold enthusiasts. The new fix should help reduce the strange mini-crashes that often occur on the COMEX during the night.
  12. Gold is probably poised to begin trading with much greater stability and transparency than it has for many years, thanks to the tireless efforts of the entire SGE team.
  13. Gold-related events in India are also very encouraging. Please click here now. Dore bar imports and refining are clearly being ramped up in a big way, and several refiners are working hard to become LBMA-certified.
  14. The cold reality of what I call the coming "bull era" is that most Western gold investors, including myself, got into gold for reasons related to the fear trade.
  15. Ironically, odds are high that love trade demand in Chindia is what ultimately drives gold to prices that enthusiastic fear traders only dream about.
  16. The fear trade will always play a key role in global gold price discovery, and geopolitical events in the Mid-East are the most likely catalyst for the next big price surge.
  17. The fear trade related to economics may be on the back burner for a while. Once US inflation and government entitlement problems become a serious concern for money managers, it will move to the front burner again.
  18. I predict that happens in 2017, as Chindian love trade demand begins to overwhelm mine supply. A perfect "gold price storm" to the upside is coming. For all good things, patience is required!
  19. In the meantime, with mine supply roughly unchanged, love trade demand and the PBOC buy program alone, should steadily push gold to higher levels that are sustained.
  20. Both GDX and GDXJ can likely trade at a new high, with gold only rising to about $1500. There are two reasons why this is possible.
  21. First, most gold mining companies are vastly "leaner and meaner" now, than they were several years ago. Second, steadily rising US inflation with a soft general stock market is highly attractive to large institutional money managers.
  22. For a look at the GDX daily chart, please click here now. Like gold bullion, gold stocks are overbought in the short term, and eager traders can book light profits now.
  23. There is an inverse head and shoulders bottom pattern in play, and the great news is that it may be morphing into a bigger one. To look at that possibility, please click here now. While a shallow pullback is probably preferred by most gold stock enthusiasts, GDX could decline to as low as $14, to carve out the right shoulder of this bullish pattern.
  24. If all plays out as I'm projecting, this year should end with GDX trading in the $18 to $19 price zone, poised to begin a fabulous year in 2016!

How an Earnings Recession Will Kill Your Portfolio

Tony Sagami

“Earnings are the mother’s milk of stocks.”

—Old Wall Street adage

Alcoa is the first major company to report its quarterly results, so it often sets the tone for the rest of earnings season. If Alcoa’s results are any indication, things could get very ugly very fast.

It’s no secret that commodity prices have dropped, but the impact on corporate profits is worse than Wall Street expects.

Alcoa reported earnings well below Wall Street’s already-lowered expectations of 7 cents per share on $5.57 billion in revenue; much lower than the 13 cents per share on a $5.65 billion forecast.

Alcoa shares got hit hard on that big miss, and while nobody likes losing money, it is a painful reminder that nothing goes up forever.

In the last 15 years, we’ve seen two painful bear markets that temporarily wiped out investors’ capital: $5 trillion during the dot-com bust and $7 trillion in the financial crisis of 2008.

The stock market goes up and the stock market goes down, but one thing that doesn’t change is the hunt for companies that are still growing their earnings.

If you can identify those companies… you will make money.

The earnings of the 500 stocks that make up the S&P 500 peaked in the third quarter of 2014 and have fallen since then. However, that doesn’t mean profits are falling everywhere.

Six out of the nine broad sector categories have seen their profits fall. Profits of energy companies (no surprise) have dropped the most, followed by Consumer Staples, Financials, Industrials, Materials, and Utilities.

However, the profits of Health Care (+28.7%), Consumer Discretionary (+12.1%), and Information Technology (+10.6%) are up during the same period.

More importantly, the stocks in those sectors that are growing their profits also delivered the best performance. As the chart below shows, Health Care and Consumer Discretionary were the two strongest-performing sectors.

The moral of the story is, of course, that identifying the sectors with the strongest-growing profits is more important than the bull versus bear market debate.

So what’s the earnings outlook today?

The S&P 500 is now trading at 17 times trailing 12-month earnings based on the consensus year-end earnings estimate of $111.62.

Those earnings estimates, however, have been steadily declining—from $137.19 in March 2014 to $111.62 today.

What about 2016? The average estimate for the S&P 500 is $131.46, which implies a 17.5% increase in corporate profits over the next year.

Of course, the actual earnings number will be different—perhaps a bit higher or perhaps even lower. But regardless of what the actual 2016 earnings end up being, there will certainly be sector winners and sector losers.

Who will that be? That’s the million-dollar question, but I believe it’s NOT going to be energy and materials companies. You’ve been warned.

The Bad News Is Good Con Remains

Naturally you can assume that portfolio managers are working hard to stay invested since that’s their duty. The herd can invent all manner of spin to keep the con going that bad news remains great since the Fed “can’t” or “won’t” raise interest rates. This is all bulls focus on.
Sure they can cherry-pick news they like and ignore fundamental weakness. Does it rankle others like yours truly! You bet!

My duty is to report what I see but then follow the trends the tape dictates. It’s a difficult act as you deal with both issues.

I’ve no idea who’s buying this bad news day, perhaps sovereign wealth funds, hedge funds and the like, but it doesn’t pay to know since the tape is the tape period.

Financials and banks led Thursday’s rally for example as CitiBank beat lowered estimates. This translated to bulls who ramped the entire sector, even those that didn’t do well (JPM, GS and etc.)

And, as to bad news? Well, there’s always economic data to consider led by gains in core inflation (0.2%) led primarily to rising rents. (If you live around here, you’ll know what I mean.) Meanwhile the nasty economic data persists as the Empire State Mfg Survey slumped to –11.36 and the Philly Fed Business Survey also fell to -4.25.

Bottom line, where’s Spock when you need him.

10-15-2015 5-48-26 PM

The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.

Volume was healthy and breadth per the WSJ was positive.

10-15-2015 5-49-13 PM dIARY

Once again, if the trend is durable (now rising short-term) supporting news must follow. We’ll have to wait and see.

Another maxim advises, if markets rise on bad news, that’s bullish.

Just sayin’ and apologies for the short post.

Let’s see what happens.