The Federal Reserve blinks, citing global economic uncertainty. - Alaska Permanent Capital Management


The Federal Reserve blinks, citing global economic uncertainty.

PantagesAfter having hinted at a September rate hike a few months ago, recent market volatility has spooked Janet Yellen and company. They left short term rates unchanged at the Thursday FOMC meeting noting “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.”

They are happy with developments in the labor market (unemployment rate at 5.1%) but view inflation as too low (it’s +0.2% y/y) and well below their 2% inflation objective.

They also lowered their long run growth potential for the economy a bit to 2.0% (implying slightly lower profit growth – implications for stocks?) and ratchetted down their projections for the path of the federal funds rate out three years. Still, the Fed’s expected rate path is well above that embedded in the Treasury yield curve.

Unfortunately the when/will they hike?” melodrama is not over. We will do all of this again before the next Fed meeting in late October (a hike then is unlikely). It just creates more uncertainty, dims animal spirits, and provides full employment for monetary economists. Is the global economy so weak that it can’t withstand a measly 0.25% hike in short term rates?

Bond prices rallied (yields fell) on the news. The two year Treasury dropped 14 basis points to yield 0.68% by the close Thursday. The ten year Treasury closed Friday at 2.13%, down 6 basis points over the week.

The S&P 500 appeared dazed and confused by the Fed action and commentary. After rallying strongly early in the week it gave back those gains after the Fed announcement. It closed the week at 1,958, down 0.1% from the previous Friday. The total return on holding the S&P 500 is now -3.5% year to date.

There is some risk of another government shutdown come September 30 when funding for the government expires. More noise for the markets.

House Republicans want to vote to lift the nations four decade ban on oil exports – recall it was put in place in the 1970s after the Arab oil embargo. There is a glut of domestic oil – we are pumping at a rate of 9.3 million barrels a day – 70% higher than five years ago. The Energy Department says lifting the ban wouldn’t increase gas prices here in the US. The White House is opposed to lifting the ban.

AP: OPEC insiders expect oil prices to reach $80…by 2020! A slowing in rival non-OPEC production will not be not enough to absorb the current oil glut. (Recall the IEA said last week that non-OPEC oil would fall sharply in 2016. WTI oil ended the week at $44.68)

ISI: Gasoline futures declined -6 cents on Monday to $1.30, which with the usual 70 cents increment, puts retail gas prices on track to decline to $2.00. It usually takes six weeks. The current national price is $2.35. Retail prices a year ago were $3.40 and two years ago almost $3.55.

ISI: After the employment report, the CPI release has been the most influential report upon capital markets over the last two years.  [Tuesday’s] headline CPI was -0.1% in August which puts the YoY at +0.2%. Ex food and energy the core CPI edged up just +0.1% which puts the YoY inflation reading at 1.8%. So no significant inflation or deflation in the data.

AP: Judging Abenomics no longer up to the task of buoying Japan’s economy, S&P lowered Japan’s long-term credit rating to A+ noting “economic support for Japan’s sovereign creditworthiness has continued to weaken.”

Nick Papandreou, a leading political commentator, thinks the Greek election this weekend is too close to call but that there is a very strong likelihood that it will result in a coalition government that will be committed to implementing the third bailout program. Therefore, there is little risk that the election leads to a resumption of the Greece crisis.

Congratulations to AWMIs Cathie Straub, who will receive a 2015 YWCA Alaska Women of Achievement award on November 12. It is quite an honor.

The Alaska Permanent Fund Board meeting will be September 29/30 at the Westmark hotel in downtown Anchorage. It’s open to the public. Scheduled presentations from Bridgewater and Goldman Sachs look interesting.

For information about the APCM Wealth Management for Individuals Empowered Women Smart Money speaker series and it’s next event on Wednesday, September 30, 2015 about finding your purpose, passion, and adventure in your retirement years, contact Amber Frizzell,

Jeff Pantages, CFA®
Chief Investment Officer


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