Seeing the Forest through the Trees
The nexus of anxiety surrounding China and its slowing rate of growth eased this week as both the Red Giant and its neighbor Japan signaled tax cuts and infrastructure spending, the kind of expansionary fiscal policy many market watchers have been anticipating. Chinese leaders have been vocal in attempting to reassure markets about their economy but the latest evidence of declining exports and imports reported earlier this week continues to point to an economy struggling to make the transition away from investment-led growth. Though slower growth in China and recessions in Brazil and Russia are dampening the earnings of U.S. multinational companies operating in these countries, we see nothing more systematic in the latest stock market correction. As they say, this too shall pass.
All Over but the Yellen
All of which brings us to next week’s Federal Reserve meetings, at which time FOMC policymakers will convene to decide whether the U.S. central bank will finally lift short-term interest rates, which have been targeted to zero percent for nearly seven years. Arguably, the Fed has achieved its employment objective as measured by an unemployment rate approaching 5 percent and a job base that has joined GDP in record territory. What hasn’t been achieved is the Fed’s price objective of 2 percent inflation, and though Chairwoman Janet Yellen has signaled her belief that low oil prices and the inflation dampening effect of a strong dollar are transitory, some pundits question the sagacity of moving on rates with inflation so far from the target.
Will Tighter Labor Markets Hold Sway?
We agree with Yellen’s view on both points – our belief is that oil prices have bottomed and will rise from here, and that the best gains of the trade-weighted dollar have already been achieved. What’s driving Fed hawks to be pro-active in raising rates ahead of any visible inflation is the labor market which, according to this week’s Job Openings and Labor Turnover Survey (JOLTS), now sports the highest level of unfilled jobs in 15 years. High demand for jobs relative to the supply of labor could draw disaffected workers off the sidelines but tighter labor markets might also begin to force employers to raise wages and salaries to attract and retain talent. So while investors have yet to see the evidence of a tightening labor market in key statistics, like wage growth and rising unit labor costs, we would argue that the Fed is best served to be anticipatory in setting monetary policy.
Our Takeaways from the Week
- Equities remain volatile as investors grapple with a slowing Chinese economy and uncertainty about Fed rate hikes
- We believe the U.S. economy is healthy enough for the Fed to achieve lift-off from zero interest rate policy