Stocks opened sharply higher this morning in the wake of yesterday’ Fed meeting. The Dow and SPX are currently up 234 pts and 1.36%, respectively. All ten sectors are in the green, led by tech and industrials. Energy stocks are struggling to hang onto modest gains. WTI crude oil rebounded again this morning (up over $57/barrel), trying to put in a bottom. And interest rates are heading higher as well (see comments on the Fed meeting below). The 5-year Treasury yield shot up to 1.66% this morning and the 10-year rose to 2.21%.
Saudi Arabia’s oil minister, sounding a bit more conciliatory on oil than he has in past weeks, said his country needs help (from other significant producers around the world) cutting production. He believes OPEC alone cannot cut enough to make a dent in the global supply of oil. He further implied the massive decline in oil prices is temporary, but that Saudi Arabia is concerned with maintaining their market share. “OPEC’s quota as well as Saudi Arabia’s in the global oil market has not changed for several years, which is at the level of 30 million barrels per day for OPEC…while the production of others from outside OPEC is continuously rising.” By “others” he clearly means the US.
The Federal Reserve’s Open Market Committee wrapped up its two-day meeting yesterday. Chair Yellen did offer some guidance on the Fed-funds interest rate. First, the committee dropped the “considerable time” language from its guidance, meaning it may not be very long before the Fed begins raising rates. Ms. Yellen said the committee can be “patient” in normalizing rates, and doesn’t foresee rate hikes for “at least the next couple of meetings.” Second, almost all committee members think it will be appropriate to raise rates in 2015, and they are looking for signs of “liftoff” in the economy. The fed-funds rate is expected to be around 1% by the end for 2015, implying multiple rate hikes. Third, the Fed expects inflation to remain in the 1.0%– 1.6% range next year, moving to the 2% target in 2016. So a very gradual increase. This ought to tell you the Fed plans to begin normalizing rates before inflation hits their target, and the reason is that economic growth appears to be sustainably improving. Believe it or not, the Fed forecasts GDP growth of 3.0% in 2015.
The Russian economic crisis continues. General Motors has now suspended new car deliveries to Russian dealers. Vladimir Putin said in a speech that “external” factors are to blame for the mess, and continues to believe the West is responsible for the civil war in Ukraine. He said Russians need to be ready for a couple of very difficult years, but the country should begin growing again in 2017.
The US Index of Leading Indicators (LEI) rose .6% in November following a .6% gain in the prior month. Improvement in the 3-6 month outlook for the US economy was a bit better than expected, and the index is up for the third consecutive month. LEI is about 6% higher than it was a year ago. We like this index because it is forward-looking and includes more than just opinion survey data. The chief economist at the Conference Board, which publishes the index, said, “we are seeing the first signs of wage growth starting to pick up.” That’s a big deal, and the Fed will obviously be paying attention to it.
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