08/19/15   Minute Inflation and FOMC Minutes

Editor’s Corner

Ron Rowland

The Federal Reserve doesn’t have an FOMC meeting in August, but that isn’t keeping it out of the news today. This afternoon the Fed released its minutes from the July meeting and that created movements in stocks, bonds, currencies, and even commodities. Before rushing to see exactly what those movements were, remember that the knee-jerk reaction is often reversed with minutes, hours, or days. I don’t want to keep you in suspense—the initial reaction was positive for stocks, bond prices, foreign currencies, and crude oil. Tomorrow could be a different story.

Anyone thinking that the Fed was on course for a September interest rate hike was probably disappointed with the contents of the minutes. The most relevant paragraph reads, “The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range. One member, however, indicated a readiness to take that step at this meeting but was willing to wait for additional data to confirm a judgment to raise the target range.”

Discussions about reducing the Fed’s balance sheet also took place, and that subject, too, concluded without any change. As various bond holdings mature, the Fed plans to maintain its current policies of reinvesting principal payments from agency securities and rolling over maturing Treasury securities.

Inflation could be the sticking point that is preventing the Fed from taking steps toward normalization. The Committee has long had an objective of 2% inflation. In past stimulus cycles, interest rate reductions generally spurred a pickup in economic activity, followed by rising inflation. This cycle has been different. Even though interest rates have been pushed down to historic lows, and then held there for a historic length of time, the government’s official measure of inflation has barely budged. The Consumer Price Index is up just 0.2% over the past year, or 90% shy of the Fed’s objective.

Coincidently, or perhaps not, the Kansas City Fed’s annual economic symposium at the end of this month in Jackson Hole, Wyoming, is titled “Inflation Dynamics and Monetary Policy.” Fed Chair Janet Yellen will not be attending this year’s confab, leaving Fed watchers yearning for other sources of clues about the September FOMC meeting. Another newsworthy item surrounding today’s FOMC minutes was that Bloomberg accidently leaked a portion of the minutes early. The Fed reacted by publishing the minutes in their entirety ahead of its 2:00pm schedule.

Investor Heat Map: 8/19/15


Not only did Utilities ascend to the top of the rankings, it also created a significant amount of margin between itself and the other sectors. Its jump from third to first adds to the defensive posture that has been building the past few weeks. Utilities is also known for its high dividend yield, and another high yielding sector, Real Estate, jumped from sixth to second. The climb for Utilities and Real Estate pushed Consumer Staples from first to third and Financials from second to fourth. The displacements didn’t stop there, as Consumer Discretionary and Health Care are both a rung lower this week. Despite the overall defensive tone, the quantity of sectors in the green increased this week with the addition of Telecom. The four sectors at the bottom all improved their momentum scores, but not by enough to change their rankings or put them back into a positive trend. Crude oil fell dramatically the past week and closed below $41 a barrel today. The stocks of the Energy sector tried to decouple from crude oil and rallied somewhat this past week, but they are succumbing to the downside today.


Last week the quantity of style categories with positive momentum dropped from five to one. This week that change reversed itself and there are once again five in the green. Their momentum scores leave a lot to be desired, but they are positive numbers nonetheless. Large-Cap Growth is on top for a third week, and Mid-Cap Growth climbed two spots higher to claim second. Mega-Cap and Large-Cap Blend are both a notch lower, while Mid-Cap Blend held steady in fifth. Relative strength among the style-box categories resides in the upper-right hand corner, which is home to growth-oriented stocks with larger capitalizations. This becomes more obvious when looking at the lower-ranked categories, and their concentration in the lower-left hand corner of the style box. The four smallest capitalization categories are again at the bottom, with Small-Cap Value relegated to tenth and Micro-Cap coming in dead last.


Every global category outside of the US lost momentum the past week. Japan kept its decline relatively small, which allowed it to move up a notch and take the top spot away from the Eurozone. The small 2-point improvement in the US momentum score was enough to flip it from red to green and boost its ranking from fifth to second. The Eurozone swung from a +9 to a -7 momentum score and fell from first to third as currency weakness contributed to downside action. Relative strength from the US helped pull World Equity two spots higher, while EAFE and the UK both slipped lower. EAFE also gave up its last sliver of positive momentum. Canada and Pacific ex-Japan held their ground on a relative basis while slipping deeper into the red. China and Emerging Markets swapped places with China gaining the upper hand. Latin America has a solid lock on last place.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The little bit of inflation uptick there had been is fading. It’s hard for policy makers to be reasonably confident that inflation is heading back toward that 2 percent target.”

– Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC


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