Stocks are chopping around the unchanged line on Wednesday in response to some stronger-than-expected economic reports, including the government’s first estimate of second quarter GDP growth. The Dow Jones Industrial Average tested below its 50-day moving average for the first time since May — a bout of volatility investors haven’t seen for a long time.
Normally, good news would be considered good news. But these days, with the market so dependent upon cheap-money stimulus from the Federal Reserve, any indication of a strengthening economy (and rising inflationary threats) is considered bad news since it brings forward the likely timing of the first short-term interest rate hike.
Indeed, the policy hawks are already making their reservations known with Dallas Fed president Richard Fisher letting loose with a Wall Street Journal op-ed on Tuesday titled “The danger of too loose, too long.”
In today’s Fed meeting statement, Philly Fed president Charles Plosser dissented and voted against the statement because of his objection to the commitment to hold interest rates near 0% “for a considerable time” after the QE3 bond buying stimulus ends (likely in October, and ratcheted down another $10 billion today) because “such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.”
Here are three things you need to know about the economic data heading into the next big data release that could change the calculus for the Fed — Friday’s jobs report — and what you should do in the meantime.
Economic Data – GDP Growth Rebounds
Click to Enlarge After a weather- and inventory-related plunge in the economy in the first quarter, things bounced back nicely as winter’s chill faded. From an upwardly revised 2.1% annualized drop in Q1, one of the worst non-recessionary performances in the history of the U.S. economy, GDP jumped at an annualized 4% rate in Q2 thanks to a swing in inventory growth. This beat the consensus estimate of a 3.1% gain.
Digging into the numbers, the sub-components reflected broad strength with resident investment, business fixed investment and consumption expenditures all putting in good performances.
Macroeconomic Advisers is looking for Q3 GDP growth to slow a little to 3.2% as the rebound in inventories normalizes.
Economic Data – Inflation Steadily Rising
Click to Enlarge One of the big points of concern for the policy hawks has been the healthy rebound in inflation, with consumer prices already rising at a 2.1% annual rate — above the Fed’s 2% inflation target.
There are multiple ways to measure inflation, with some measures hotter than others. But today, another inflation measure — the GDP price index — provided more evidence that inflation has returned to normal levels. The growth in the GDP price index increased to a 2% annualized rate, a level that it hasn’t seen 2012.
The Fed was forced to acknowledge this in their policy statement today, highlighting that inflation has moved back toward its longer-run objective and that the risk of inflation “running persistently below 2 percent has diminished somewhat.”
Economic Data – Jobs Keep Coming
Click to Enlarge Heading into Friday jobs report, the ADP report on private payrolls came in at a softer-than-expected 218,000 jobs in July. This was below the 230,000 that was expected and indicates that Friday’s nonfarm payroll number could be soft (consensus is looking for 230,000).
But analysts at JPMorgan note that the first prints of the ADP data and the government’s nonfarm data have deviated by an average of about 40,000 since late 2012. That suggests that the softer ADP number doesn’t preclude a strong nonfarm report on Friday.
Still, the run of 200,000 plus ADP reports now goes back to April, continuing a run of strong job gains that has the team at Capital Economics looking for a drop in the unemployment rate on Friday to 6%.
Click to Enlarge How should investors play all this?
The strengthening of the U.S. economy, and the upcoming end of the Fed’s bond purchase program, has been a boon to the U.S. dollar. The greenback as represented by the PowerShares US Dollar Bullish Index Fund (UUP) is up nearly 3% since May as the Japanese yen and the euro suffer from weakness.
This help keep a lid on inflationary pressures as it’s pushing down energy costs.
One way to play this is to bet on the dollar by betting against the yen via the ProShares UltraShort Yen (YCS), which is breaking up and out of a wedge consolidation pattern going all the way back to January.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended YCS to his subscribers.