, CEO & Principal Analyst
7/15/2015 6:38 AM
Today and tomorrow, Fed chair Janet Yellen speaks before the Congress. Between being lured to support ideas and programs pitched from both sides of the aisle (as well as explain why the food stamp program went down in some districts), we will learn if the monetary body thinks it is that time to make a victory lap. This has been the dilemma for a long time.
How do we keep up the accommodation after five years with an additional $3.5 trillion in money printing and justify its very existence and autonomy. Moreover, the Fed is spent; there's no way it could come up with additional aid and it not be seen as desperate. So, how do we hike rates and begin to mitigate the ticking time bomb from all the artificial cash flowing through the system?
We know the Fed's primary goal is to improve the jobs market and maintain healthy (read below) inflation. However, let's face it, the Fed has focused on the housing market, considering it was ground zero from the last financial crisis. There is more to moving housing and getting people to spend money than Fed actions, but the needle on approvals has begun to move.
Ironically, critics think greater access to mortgages, credit cards, and auto loans are the very thing that got the nation in trouble in the first place.
Today, the House will focus on five key areas:
- When will the Fed normalize rates?
- How healthy is the jobs market?
- Geopolitical risk to our economy?
- Where's inflation?
- Has the Fed become too big to fail?
It should be quite a show!
Irrational Exuberance II
The one thing members of Congress will not be asking the Fed chair is for investment advice.
One year ago today, Janet Yellen made her now infamous call on biotech and social media stocks, calling their valuations "substantially stretched." That day, the Biotech Index (NASDAQ:IBB) was smacked and it fell the following session as the bears piled on while the shorts made their move.
Yesterday, the index was up 50% and this week saw another blockbuster deal: Celgene (NASDAQ:CELG) buying Receptos (RCPT) for $7.0 billion.
I am not poking fun at Janet Yellen, but I think her biotech call was a clumsy way of assuaging the raging bears and bulls of Wall Street. She acknowledged there was some froth, but trying to limit it to a couple pockets of the market. And, at the same time, hinting rates would remain at zero.
Moreover, I suspect the Fed will just use more confusing language like Greenspan instead of trying to baby the babies of Wall Street. I would say, however, while Greenspan was right about his warning of irrational exuberance, it was just about four years too early.
The S&P 500 and the Dow Jones Industrial average opened in the red this morning while the NASDAQ held onto its gains. The Bureau of Labor Statistics released the Producer Price Index (PPI) report for the month of June. During the month, price growth decelerated, rising 0.4% after gaining 0.5% in the prior month, but was higher than the 0.3% expectation. Year-over-year, PPI is down 0.7%, a slight improvement from the 1.1% decrease in the prior month. Core PPI which excludes food and energy rose 0.3%, surpassing the previous month gain and consensus estimate of +0.1%. Weakness was seen amount electric power and pharmaceutical products as well as the inelastic good, cigarettes. However, gasoline and food continued to the gains observed during the month. The Fed is aiming for an inflation growth target of 2% year-on-year and today's results show the US has a long way to go to achieve that.
There was a series of data release this morning including the Empire Fed manufacturing survey, the Federal Reserves' Industrial Production and Capacity Report to name a couple. We will dig further into these in the afternoon note.