Wednesday, June 10, 2015
Perspectives from Above the Noise – Week of June 8, 2015
The past week saw some volatility in global asset markets highlighted by another sharp leg higher in bond yields. Last Wednesday's press conference with European Central Bank (ECB) President Mario Draghi was relatively uneventful but still managed to contribute to renewed volatility in global bond markets. Draghi dovishly reiterated that the ECB remains committed to completing its quantitative easing program and has yet to even discuss an exit strategy.
March and April's somewhat weak job creation was revised higher by a total of 32,000 net jobs and total payrolls are now up 2.21% year-over-year, the fifth best gain since the 1990s. The solid jobs data added to the longest stretch of job gains in the modern economic history of the U.S. - a streak which does not appear at risk of ending in the near-term. The solid jobs report contributed to a surge in 10-year Treasury yields, which ended the week at the highest level since September.
For the week, the S&P 500 lost -0.69%, the Dow Jones Industrial Average fell -0.90%, and the MSCI EAFE (developed international) dropped -1.71%.
Here are the 3 stories this week that rose above the noise:
Surge in Jobs Gives Fed Clearer Path to Raise Rates This Year
The likelihood of a Federal Reserve interest-rate hike this fall increased following an impressive rise in payrolls in May, providing evidence the U.S. labor market is re-accelerating following a weak first quarter. The U.S. economy added 288,000 jobs in May and wage growth increased. Federal Reserve Bank of New York President William C. Dudley is encouraged by the improving labor market, stating, “it is likely that conditions will be appropriate to begin monetary policy normalization later this year.”
The U.S. economy contracted by 0.7 percent in the first quarter, but the weakness is widely considered temporary and a result of harsh winter weather and the labor dispute at West Coast ports. Recent economic data has been supportive of faster economic growth in the second quarter, including better-than-expected growth in housing, construction, auto sales, employment, and manufacturing.
Why Fed Watchers May be Overestimating the Pace of Rate Increases
An article from the Wall Street Journal sheds light on the inner workings of the U.S. Federal Reserve and the power structure behind interest-rate decision-making. It points out that the Fed’s smaller Board of Governors (BOG), five of its Federal Open Market Committee’s (FOMC) 10 members, will control the rate paid on bank’s reserves held at the Fed. Since open market operations are no longer sufficient to drive the cost of borrowing in the federal funds market to the FOMC target, the BOG will be able to essentially set overnight rates. So, while improving economic data may increase the probability of an initial rate increase in the fall of 2015, since the BOG is considerably more dovish than the FOMC, Fed watchers may be overestimating the pace of rate increases because they are focusing on the wrong committee.
Involuntary Part-Time Work: Here to Stay?
A research piece from the Federal Reserve Bank of San Francisco looks at one element that continues to suggest significant slack remains in the labor market, which is the prevalence of involuntary part-time work. The research attempts to separate involuntary part-time work into cyclical factors, which are likely to reverse as the economy strengthens, and structural forces which are likely to persist even when the economy is at full employment. The conclusion is that both cyclical and structural factors are at work, but importantly, it appears that cyclical involuntary part-time work remains very elevated relative to pre-recession levels. The implication of this finding is that slack remains in the labor market despite strong recent job gains. This slack is one reason to believe the Fed will pursue a very gradual path of interest-rate increases once it begins its tightening cycle.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
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