In general terms, the overall economy continues to gradually improve. Labor unemployment and job creation is improving. Although consumer demand is also improving, this is moderated by consumers’ continuing to avoid debt and leverage that got us all into trouble prior to the last financial melt-down. There is plenty of room for further dramatic improvement, but there remain many hurdles to overcome to get there.
We previously wrote that the EU economy was weakening and that because allegiance to austerity, any stimulus would be unlikely. We were wrong. The ECB stepped in with what is called “quantitative easing” in central banking parlance, “money printing” to the rest of us. On foreign exchange markets, the Euro subsequently and predictably, took a nose dive, meaning in turn, that the dollar went up, their exports improved and a small recovery seems to be taking hold. On the other side, American imports become cheaper curtailing further inflationary pressures and exports become more difficult with the effect being that corporate profits are hurt and the economy slows.
These effects lead squarely back to the Federal Reserve and whether they will be able to raise interest rates as they seem so determined to do. Even though labor markets are marginally improving, the prospects are, “not anytime soon”. Higher interest rates would only make a strong dollar even stronger exacerbating the earnings and export problems. Furthermore, since a strong currency curtails inflationary pressures, the Fed’s need and desire to raise rates is further diminished. In our view, the longer the Fed keeps “jawboning” for minimal tightening in the form of higher rates, the markets will remain choppy. As a practical matter, given the above, most Fed watchers now believe, as do we, that even in the face of stronger labor markets, any interest rate increases will now be pushed off until late this year or more likely, next year.
Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA