by Scott J. Brown, Ph.D., Chief Economist
As was widely anticipated, the Federal Open Market Committee tapered another $10 billion from the monthly pace of asset purchases (now at $25 billion, with the program on track to be completed at the end of October). The Fed provided no additional guidance on short-term interest rates, but repeated that the federal funds rate target would likely remain exceptionally low for "a considerable period" after the asset purchase program ends and that economic conditions will likely warrant a below-normal federal funds rate even as the Fed nears its employment and inflation goals. In the policy statement, the FOMC recognized that inflation has "moved somewhat closer" to its long-term objective and that labor market conditions have improved, but it also emphasized that "there remains significant underutilization of labor resources."
Real GDP rose at a stronger-than-expected 4.0% annual rate in the advance estimate for 2Q14, while the first quarter figure was revised from -2.9% to -2.1% (first half GDP growth now stands at a 0.9% annual rate, vs. expectations of about 0% before the report). A little over 40% of the second quarter’s growth came from a more rapid pace of inventory accumulation – a pace that will be difficult to sustain in the quarter ahead. Domestic Final Sales, a measure of underlying domestic demand, rose 2.8% (vs. +0.7% in 1Q14). The 2Q14 GDP figure should not change the Fed’s policy outlook – but market participants feared that the Fed may move sooner rather than later, pushing long-term Treasury yields higher and hammering the stock market.
The July Employment Report was moderately strong. Nonfarm payrolls rose by 209,000, less than expected, but the two previous months were revised a net 15,000 higher. The unemployment rate edged up to 6.2% (vs. 6.1% in June and 6.3% in May) reflecting a small increase in labor force participation (which was probably just statistical noise). Average hourly earnings were flat, up 2.0% year-over-year (note that the CPI rose 2.1% over the 12 months ending in June).
Next week, the economic calendar thins out considerably, and that’s a good thing, as it may take some time for the markets to digest all of the recent economic data. The ISM Non-Manufacturing Index has some potential to surprise, but is unlikely to add much to the overall picture of the economy. Productivity figures should rebound in 2Q14.
YTD return %
Consumer Money Rates
Dollars per British Pound
Dollars per Euro
Japanese Yen per Dollar
Canadian Dollars per Dollar
Mexican Peso per Dollar
10-year municipal (TEY)
Treasury Yield Curve – 8/1/2014
S&P Sector Performance (YTD) – 8/1/2014
ISM Non-Manufacturing Index (July)
Nonfarm Productivity (2Q14, preliminary)
KC Fed Monetary Policy Symposium (Jackson Hole)
Labor Day (markets closed)
Employment Report (August)
FOMC Policy Decision, Yellen Press Conference
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Material prepared by Raymond James for use by its financial advisors.
Data source: Bloomberg, as of close of business July 31, 2014.