Today, the Federal Reserve released the minutes from the FOMC meeting that concluded July 30. The post-meeting statement, as you may recall, was rather benign and did not indicate much change in the Fed’s thinking. The newly released minutes give us a different view.
There is growing dissent among the members as to when to start raising interest rates. “Many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term. These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate. They suggested that the guidance should more clearly communicate how policy-setting would respond to the evolution of economic data.”
In the past, the market has responded abruptly and negatively to the suggestion the Fed may increase interest rates sooner rather than later. Given the contents of the minutes, a 200-point drop in the Dow would not have surprised us today. Instead, the venerable index merely pulled back a little in the early afternoon and then finished the day with a 59-point gain.
Yesterday’s report that new housing starts topped the one million mark could also have been the extra ammunition the Fed was looking for to begin raising rates. Instead, the good news was interpreted as good news, and stocks rose. The 10-year Treasury yield is also failing to show fear, closing today below 2.43%.
One area of interest or curiosity, to us anyway, is the Fed’s new passion for the word “liftoff” in its minutes. We initially presumed it was in reference to when the U.S. economy gets off the ground, but not necessarily achieves orbit. For instance, on the subject of keeping the federal funds rate as the key policy rate, the minutes indicated that most meeting participants agreed it was the best choice. Additionally, they supported a continuation of the current low rate through “liftoff and for some time thereafter.”
However, in other instances, the term seems to imply the actual lifting (raising) of interest rates from their near-zero level. For example, according to a survey the Fed discussed, the most likely time for “the liftoff of the federal funds rate” was centered in the third quarter of 2015. In all, the word “liftoff” appeared five times in the July minutes and five times in the June minutes, after making zero appearances in the April minutes. The Fed’s annual Jackson Hole confab is getting under way, and we anticipate many liftoff provoking speeches.
Every sector posted a momentum improvement this week. Technology continues to provide the leadership, extending its stay at the top to six weeks. Meanwhile, the second-place occupancy has changed nearly every week with Health Care moving up a notch to grab it today. Much of Health Care’s recent strength is coming from biotechnology stocks. Real Estate was pushed down to third but is still quite healthy as it is one of the three sectors at the top that are sitting far in front of the pack. Materials and Consumer Discretionary held their positions and boosted their momentum scores into double digits. Five sectors moved from the red to green this week, which is always a welcome event. Industrials had the largest improvement of the bunch, climbing two spots to eighth. Utilities also improved its ranking and pulled itself out of last place in the process. Telecom has completed its round trip in the rankings. It was in last place in mid-June, then it embarked on a six-week climb to second place. It held that position for two weeks, but it plunged all the way back to the bottom in the most recent two-week period. The sector-wide euphoria surrounding the IRS ruling allowing Windstream (WIN) to spin off many of its assets into a REIT has evaporated.
The style-box rankings have been in a defensive posture for many weeks, but now that pattern is breaking up. Large Cap Growth moved up from second place to wrestle the top spot away from Mega Cap. Mega Cap had the #1 position all to itself for five weeks before dropping down today to share the runner-up position with Mid Cap Growth. With two of the three Growth categories now at the top, the market is indicating a preference for Growth stocks over Value. The shuffling at the top caused Large Cap Value to drop all the way to seventh behind Mid Cap Value, leaving no Value categories in the upper tier. The market rally pushed four categories out of the red, including all three Small Cap designations. Only Micro Cap remains in negative territory, although it shouldn’t take much upside action to make it join the others.
China continues to lead the global rankings by a wide margin, although that margin shrunk considerably the past week. China managed to increase its momentum by a point, while second-place Latin America boosted its score by a dozen points. Emerging Markets finds itself in the third place slot for a fourth week. Pacific ex-Japan traded places with Canada again, and this week Pacific ex-Japan got the upper hand. The U.S. and Japan also swapped places, allowing the U.S. to move up to the mid-way point. Unlike the sector and style rankings where multiple categories flipped from red back to green this week, only World Equity accomplished that task among the global categories. The trio of U.K., EAFE, and Europe are at the tail end for the sixth week running. Europe is still on the bottom, lagging far behind the others.