No one was expecting the Federal Reserve to take any action at today’s FOMC meeting. However, Janet and her gang showed up for work anyway and took the opportunity to discuss things that concern them. Before we get into those concerns, let’s take a look at the interest-rate environment.
In the days since December 16, when the Fed raised interest rates for the first time in nine years, Treasury yields have mostly declined. Yes, contrary to conventional wisdom, interest rates have been moving down, not up. The benchmark 10-year Treasury yield went from 2.29% on December 16 down to 1.99% yesterday. That may not seem like much, but it represents a 12.8 percentage difference in yield. This counterintuitive move is not restricted to 10-year maturities either. The 5-year Treasury yield fell from 1.74% to 1.43% during the same interval, and the 30-year Treasury yield dropped from 3.00% to 2.78%.
Instead of losing money, bond-fund owners have profited over the past six weeks. The iShares 7-10 Year Treasury Bond ETF (IEF) gained 2.7%, and iShares 20+ Year Treasury Bond ETF (TLT) jumped 4.3%. The advances weren’t limited to Treasury funds either. Vanguard Mortgage Backed Securities (VMBS) rose 1.2%, SPDR Barclays Aggregate Bond (BNDS) tacked on 1.1%, and PIMCO Investment Grade Corporate Bond (CORP) edged 0.4% higher.
Many analysts point to the declines in the stock market as the reason bond prices have moved higher and yields lower. Some rely on the claim that the recent stock-market turmoil is the reason the Fed was not expected to make a move today. Indeed, the Fed’s post-meeting statement said it is closely monitoring global economic and financial developments and is assessing their implications.
However, the item that appears to be causing the Fed its most consternation is the lack of inflation. As evidence, the word “inflation” appears 11 times in the first four paragraphs of today’s press release at an average rate of once every 41 words. Their objective is to have 2% inflation. According to the Fed, inflation is running below its objective and is expected to remain low in the near term. Because of this shortfall, the Committee will carefully monitor actual and expected progress toward its inflation goal.
As part of its decision to leave the federal funds rate between a quarter and a half percent, the Fed emphasized that this remains an accommodative monetary policy stance, “thereby supporting further improvement in the labor market and a return to 2 percent inflation.”
Energy had a huge week, but it wasn’t enough to move the beleaguered sector off of the bottom of the rankings. Utilities is again the lone sector in green and has somehow managed to sidestep the January selling spree. Telecom had a good week and moved two notches higher to grab second place. Telecom pushed both Consumer Staples and Real Estate lower, and now all three are tightly bunched near the top and poised to resume their upward trends. The middle ground remains quite weak with Health Care, Consumer Discretionary, Technology, Industrials, and Financials all unable to mount a sustainable rally. Materials and Energy have been in downtrends for a year or more and have a long road ahead before they can claim a recovery.
All style categories posted momentum improvements, although they are difficult to see in today’s chart. The lineup is much the same as it has been since the beginning of the year, with the largest capitalizations at the top and the smallest at the bottom. Mega-Cap has now completed 18 weeks as the top-ranked style category. If you believe that Mega-Caps being on top constitutes a defensive posture and the possibility of market weakness, then you should be in good shape because you have been receiving that signal since October. Mid-Cap Growth and Mid-Cap Value swapped places, and they were the only changes in the relative ordering from a week ago. The 38-point spread in momentum scores between top-ranked Mega-Cap and bottom-ranked Micro-Cap remains large, but it is less than the 43-point extreme noted last week.
There are some shakeups in the global rankings today, although all categories are deeply entrenched in the red. The U.S. moved a step higher to take the top spot away from Japan, which slipped to third and was the only global category that lost momentum for the week. The Eurozone jumped from fifth to second and now heads up a traffic jam involving itself, Japan, World Equity, and EAFE. Among the lower-ranked categories, the big news this week is Canada’s improvement. Canadian stocks and the Canadian dollar each received a nice boost from the improvement in the Energy sector. Canada maintained momentum, jumping 26 points, which allowed it to climb two places higher in the rankings. Canada was on the bottom six weeks ago, and it remains to be seen whether or not this new move can be sustained. After Canada vacated the basement slot in December, Latin America became the new occupant and remains there today.
“I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.”
— Friedrich August von Hayek (1899–1992), Austrian economist
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