Because they said it was so
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The news is buzzing with the latest headlines that sell tickets to their show. It seems there is an abundance of head-turning, market-impactful, and pivotal captions worth examining to determine whether they are genuine or contentious. Just because they said it was so, doesn’t mean it is so! Here’s what I am hearing.
The U.S. Government Shutdown: The shutdown has been ongoing for 27 days, making it the second-longest in recent history. Friday marked the day when hundreds of thousands of federal employees missed a whole paycheck. Both democrats and republicans are blaming each other. The truth probably lies in the middle, as both sides try to leverage the situation to fit their own agenda. What is important for investors is that the impacts of government shutdowns are typically limited and temporary. This is not to say that there is no impact. Slow loan approvals, permit delays, and new-business delays are a few examples that slow or hinder economic growth. Stressed-out, unpaid air traffic controllers can disrupt travel when they “call in sick.” The lack of government-published economic data can cloud the understanding of where the economy really is. All this said, history suggests it will be quickly forgotten once the government reopens.
Federal Open Market Committee (FOMC): The FOMC dictates monetary policy. The Fed has two mandates. They are charged with maintaining price stability in the marketplace, thereby prompting them to control inflation. They are also directed to uphold maximum employment. Their dilemma is that these two forces are pulling policy in opposite directions. Inflation appears tamed from its peak but remains well above the target 2% level. At the same time, employment data has been showing signs of weakening as payroll numbers have dropped over the last reporting periods. At the end of the day, unemployment remains under five percent, an accepted level of excellence and often termed “full employment”.
Inflation: On Friday, the Consumer Price Index (CPI), although several weeks late, was released despite the government shutdown, which has kept most statistics from being announced. CPI month-over-month was expected to be 0.4%, but it was actually 0.3%. The year-over-year CPI was expected to be 3.1%, but it came in at 3.0%. The month-over-month release was announced as “the lowest release in three months”. The market took this as support for the Fed to do what everyone wants and expects – cut the Fed Funds rate by 25 basis points at each of the year’s final two FOMC meetings, October 29 and December 10. It is probably safe to assume this is already built into the market. Should this happen, the likelihood is that it will not have much effect on the market. An extreme miss on employment or inflation would be the most probable market movers. The other side of the data – although the month-over-month was the lowest in three months, it is still in line with the 20-year average level. Furthermore, although the year-over-year release was lower than expected, it was the highest release of the year. Maybe headlines can be spun to tell the story that sells the most tickets? Just because they said it was so, doesn’t mean it is so!
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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