As the old adage has it, the market hates uncertainty, and an unfortunate consequence of the Fed opting to keep rates on hold last week is that it seems to have increased uncertainty.
By Peter Martin
Thursday, September 24, 2015
Part of the problem is that the statement from the Fed varies little from meeting to meeting, and therefore gives little away, despite efforts to improve transparency in recent years. Reading between the lines, some have interpreted the Fed’s move as indicative of the central bank’s knowledge of deep problems with global economic growth — a kind of ‘what do they know that they aren’t telling us’ line of reasoning.
As Dennis Lockhart, the President of the Atlanta Fed, rightly pointed out yesterday though, this interpretation ignores the principal message contained in the FOMC statement: the Fed has not swerved from its description of the US economy as on an upward path. ‘Markets should first look at our characterization in the statements and in individual speeches of the economy really being on solid ground and performing well,’ said Mr Lockhart. He also pointed out that the reaction to slowing in China has perhaps been overdone. ‘China is slowing to still a very respectable pace of growth,’ Mr Lockhart said. ‘It is ratcheting down a little bit, but there is a decent chance that the world is overreacting.’ It will be interesting to see if Fed Chair Janet Yellen echoes this line of thinking when she speaks on Thursday afternoon at the University of Massachusetts.
The bedrock of US economic growth has been the labor market, which continues to be in a remarkable state of health. Jobless claims have been at or near record low levels for several weeks now and it is the same story in data released this morning. Initial jobless claims rose just 3000 last week to 267,000, beating expectations that had pointed to a level above 270,000. The result nudges the four-week moving average down from 272,500 to 271,750, suggesting labor market conditions are getting tighter.
The bad news is that indications of manufacturing suggest the economy is unlikely to be receiving any boost from this key pro-cyclical sector. The durable goods orders report for August, which was released on Thursday morning, shows a 2.0% decline at the headline level (though this is distorted by falls in the extremely volatile area of transport orders). Excluding transportation, orders were unchanged in August, providing agreement with last week’s lackluster industrial production data. Based on yesterday’s flash manufacturing PMI from Markit, things are looking no better in September, with the index stuck at a reading of 53.0, unchanged from the 22-month low recorded in August — worryingly this is below the post-financial crisis average of 54.3.
‘Manufacturing remained stuck in crawler gear in September, fighting an uphill battle against the stronger dollar, slumping demand in many export markets and reduced capital spending, especially by the energy sector,’ said Chris Williamson, the chief economist at Markit. ‘The survey is indicating the weakest manufacturing growth for almost two years, meaning the sector will have acted as a drag on the economy in the third quarter.’
Dow component Caterpillar ($CAT) will not have eased fears over the effect of slower global growth after the company announced plans for large job cuts in 2016 and lowered its guidance for 2015. Shares in the company fell more than 7% in early trading.
The wider stock market also opened negatively, the Dow Jones sliding 149 points or 0.91% to 16,131 in early trading, while the S&P 500 fell 0.8% to 1923.2.
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