Yellen's Jackson Hole Speech May Move Markets

The first eight months of the year have been dominated by one question: When will the Fed raise rates next? The answer may come from a surprising place: Jackson Hole, WY. Since 1982, the Federal Reserve Bank of Kansas City has hosted a late summer economic policy symposium in Jackson Hole. The event brings together central bankers, private market participants, academics, policymakers and others to discuss the issues and challenges in a public but informal setting. While this may sound like a bunch of boring people in a beautiful location, in recent years, some central bankers have made big news from Jackson. In 2010, Fed Chair Ben Bernanke discussed the pros and cons of several policy options, including buying “longer-term securities,” which was the premise of the second round of quantitative easing or QE2. Two years later, Bernanke used his Jackson Hole remarks to introduce the possibility of a third round of asset purchases known as QE3, when he said: “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Four years later, the central bank is no longer buying assets to prompt economic growth, but so far, it has only increased its benchmark interest rate one time-last December. While some Fed officials have recently been leaning towards an interest rate increase sooner rather than later, others are concerned that the economy remains too fragile to risk higher rates. Further evidence of the division between the two camps was evident in minutes from the last policy meeting.

That’s why at this year’s Jackson Hole confab, traders and economists will listen closely to current Fed Chair Janet Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit” to see if there is either an implicit or explicit clue about when the next rate hike will occur. While she is not likely to say, “September is baked in the cake,” she may discuss the factors that would lead to an increase in September, like another strong employment report along with firming inflation. Right now, the market is predicting just a 20 percent chance of a September move and 50 percent likelihood at the December meeting. A September surprise could knock stocks down from their peaks and usher in what could be a bumpy autumn.

MARKETS: Summertime and the living is easy….in what was a typical August week, stocks bounced around all-time highs, but closed mostly unchanged amid light volume.

• DJIA: 18,552, down 0.1% on week, up 6.5% YTD
• S&P 500: 2183, down 0.01% on week, up 6.8% YTD
• NASDAQ: 5238, up 0.1% on week, up 4.6% YTD
• Russell 2000: 1236, up 0.5% on week, up 8.9% YTD
• 10-Year Treasury yield: 1.58%
• British Pound/USD: $1.3078
• September Crude: $48.52, up more than 20% since falling below $40 in early Aug
• August Gold:  at $1,340.40
• AAA Nat'l avg. for gallon of reg. gas: $2.16 (from $2.13 wk ago, $2.63 a year ago)

THE WEEK AHEAD:

Mon 8/22:

8:30 Chicago Fed National Activity Index

Tues 8/23:

10:00 New Home Sales

10:00 Richmond Fed Manufacturing Index

Weds 8/24:

9:00 AM FHFA House Price Index

9:45 PMI Manufacturing Index Flash

10:00 Existing Home Sales

Thursday 8/25:

First day of Kansas City Fed Econ Symposium in Jackson Hole, WY

8:30 Durable Goods Orders

11:00 Kansas City Fed Manufacturing Index

Friday 8/26:

8:30 GDP

8:30 International Trade in Goods

8:30 Corporate Profits

10:00 Janet Yellen’s speech from Jackson Hole

10:00 Consumer Sentiment

Stocks: Up, Incomes: Down

You can forgive the vast majority of Americans for not celebrating last week’s 28^th record high of the year for the S&P 500 index. Oh sure, people like to see retirement accounts rise in value, but there is a pervasive sense among workers that they are not getting ahead. In fact, just as the stock market completed its strongest week in four months, a new report from Sentier Research on income revealed that many continue to struggle. As of June, median income for all households, adjusted for inflation, was $53,891. Here's the good news: in the past three years, incomes are up 3.8 percent. The bad news is that in the five years since the recession ended, median income has fallen by 3.1 percent. That’s just one of the reasons that when Federal Reserve Chair Janet Yellen delivered her much-anticipated speech from Jackson Hole, WY, she said that “the unemployment rate has fallen considerably, and at a surprisingly rapid pace,” but “the labor market has yet to fully recover.”

How has it not recovered? Well, as of July, there were 3.2 million workers who have been unemployed for more than 26 weeks and still want a job. Although this is well below the peak of 6.7 million and the lowest level February 2009, it is still very high. Additionally, while the unemployment rate has dropped nearly 4 percentage points from its late 2009 peak to 6.2 percent in July, the broad unemployment rate (defined as the official rate, plus marginally attached workers; those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part time for economic reasons), stands at a lofty 12.2 percent.

And then of course there’s the problem of Americans’ eroding earning potential, highlighted by the Sentier report. But as Yellen noted, part of the problem is structural, meaning that some global economic changes that have put pressure on incomes are here to stay. Sentier found that median income, adjusted for inflation, is 5.9 percent below where it stood in the year 2000. The stunning fact that the average American is WORSE OFF than he or she was fourteen years ago seems to get short shrift in reporting on the recovery.

There are a few factors that have contributed to the longer term slide in incomes: (1) Globalization allowed companies to move operations overseas, where wages were cheaper than in the US; (2) Technological advancements eliminated the need for as many workers overall; and (3) Most public companies have been more concerned with boosting share prices than in paying workers.

In an effort not to end on such a downbeat note, it’s worth noting that economists believe that as the economy continues to improve, incomes will slowly rise. Unfortunately, that may be cold comfort to millions who are having a hard time meeting their daily obligations. As one radio listener recently said, “I like when my 401K goes up, but it doesn’t help me pay the utility bill!”

MARKETS: Just in time for the busy Labor Day weekend, oil and gas prices have dropped to near 6-month lows.

• DJIA: 17,001, up 2% on week, up 2.6% YTD
• S&P 500: 1988, up 1.7% on week, up 7.6% YTD
• NASDAQ: 4464, up 1.7% on week, up 8.7% YTD
• 10-Year Treasury yield: 2.41% (from 2.34% a week ago)
• October Crude Oil: $93.65, down 1.2% on week
• December Gold: $1280.20, down 1.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.44 (from $3.54 a year ago)

THE WEEK AHEAD:

Mon 8/25:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 8/26:

8:30 Durable Goods Orders

9:00 Case-Schiller Home Price Index

10:00 Consumer Confidence

Weds 8/27

Thurs 8/28:

8:30 Weekly Jobless Claims

8:30 Q2 GDP – 2^nd estimate (Preliminary: 4%)

8:30 Corporate Profits

10:00 Pending Home Sales

Fri 8/29:

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment

The Michael Corleone Economy

Over the past month, the news cycle has been, in a word, dreadful. Meanwhile, the economy, the markets and the financial world in general, have been fairly quiet. Oh sure there was a flurry of downside summer selling in stocks, mostly due to geopolitical jitters, but a four percent move lower is not exactly a classic 10 percent correction. But like Michael Corleone in The Godfather III who famously said, “Just when I thought I was out...they pull me back in”, every time the economy appears to be gaining steam, something pulls it back. After a rough winter, there were three strong months of job creation, followed by a decent, not great reading in July. The ISM Manufacturing Index rose to a three-year high in July and the service index reached its highest level in eight years; but then last week, the July reading of retail sales was flat. (The once-indomitable American consumer has yet to rediscover his love for shopping on a consistent basis, which is acting as a headwind to economic progress.)

This week, the drag may come in the form of housing, which has yet to recover from the early-year severe winter weather. Despite an improving economy, still-relatively low mortgage rates, an easing of credit conditions and a slowdown in price increases, the housing market remains subdued. Economists believe that housing’s extended hibernation will draw to a close this summer, but the real estate data have been inconsistent at best.

The problem with disappointing economic reports is they raise concerns that third quarter growth will slow down from the brisk four percent annualized pace seen in the second quarter. But in the topsy-turvy, post-financial crisis world, the periodic backwards slides in economic progress can actually be good news for investors. The reason is that every time a “bad” report hits the wires, investors are reminded that the Federal Reserve is likely to keep short-term interest rates low for a “considerable” period of time. To wit, after the weaker than expected US retail sales report and a myriad of punk data from Europe, Japan and China, government bond yields in the U.S., Germany and the U.K. closed at their lowest levels of the year, as investors bet that major central banks will keep interest rates lower for longer to support economic growth. (The yield of the 10-year Treasury note dropped below 2.4 percent, the lowest level in a year.)

Low short and long-term interest rates cannot continue forever, because at some point, the economy will shift into a higher gear and the Fed will need to change its policy. Fed-watchers are hoping that this year’s three-day conference in Jackson, Wyoming, which begins on Thursday, might provide clues as to when that change could occur.

When Fed Chair Janet Yellen delivers the keynote on the topic of “Re-evaluating Labor Market Dynamics,” many expect her to reiterate that there is slack in the labor market and that inflation is not yet a problem. However, the analysts at Capital Economics predict “the combination of faster income growth, rising wealth and easier access to credit should support spending over the rest of the year. As such, the economy will still be much stronger in the second half of the year than in the first.”

If those forecasts come to fruition, we may finally escape the “Michael Corleone economy”. But there is a downside to the rosy outlook: a stronger economic showing would mean that the Fed would likely raise interest rates sooner than expected -- probably in the first quarter of 2015. Additionally, the central bank could also increase rates by more than is widely anticipated. If that’s the case, the good news for the economy could spell trouble for investors, who may be underestimating the timing and magnitude of interest rate increases.

MARKETS: The Dow crawled back into positive territory for the year and the S&P 500 is within two percent of its all-time high of 1991, reached on July 24^th.

• DJIA: 16,662, up 0.7% on week, up 0.5% YTD
• S&P 500: 1955, up 1.2% on week, up 5.8% YTD
• NASDAQ: 4464, up 2.2% on week, up 6.9% YTD
• 10-Year Treasury yield: 2.34% (from 2.42% a week ago) 52-week low in yield
• September Crude Oil: $97.24
• December Gold: $1305.50
• AAA Nat'l average price for gallon of regular Gas: $3.46 (from $3.54 a year ago)

THE WEEK AHEAD:

Mon 8/18:

10:00 Housing Market Index

Tues 8/19:

8:30 CPI

8:30 Housing Starts

Weds 8/20:

2:00 FOMC Minutes

Thurs 8/21:

Federal Reserve 3-day conference begins in Jackson Hole, WY

8:30 Weekly Jobless Claims

10:00 Philadelphia Fed Index

10:00 Existing Home Sales

10:00 Leading Indicators

Fri 8/22:

Fed Chair Janet Yellen delivers the keynote address at Jackson Hole Fed conference