Another "Fed Rally"
Equity markets posted their best weekly gain of the year as the Federal Reserve minutes, released on Thursday, showed caution over increasing interest rates. This caution persists amid a backdrop of an improving domestic economy and job market. The Fed refrained from raising short term interest rates at their September policy meeting because of now-familiar concerns that global weakness could weigh on the US economy. Voting members also expressed apprehension about persistently low inflation, although a tighter labor market later this year could still be a catalyst for raising rates.
The Fed received evidence for the bearish case for the domestic economy again this past week. US exports fell 2% in August while imports rose 1.2%, resulting in the trade deficit widening 15.6% to $48.3 billion. The now-familiar culprits for the ballooning trade gap were the strong US dollar and weak demand in overseas markets. The equity markets took the news as another indication that third quarter US economic growth was weaker than expected. We will find out on October 29th with the advance estimate of US Gross Domestic Product (GDP).
An important gauge of US services production weighed in negatively as well. The Institute of Supply Management‘s nonmanufacturing index fell from 59.0 in August to 56.9 in September. The business activity index, a gauge of services production, declined from 63.9 in August to 60.2 in September. While any reading above 50.0 indicates continued growth, the lower posted results month over month are evidence of a slowdown in the rate of growth.
The Eurozone added to global growth concerns, with the Markit composite purchasing managers’ index for the region falling from 54.3 in August to 53.6 in September. The result fell short of a preliminary reading of 53.9. Markit estimated that the Eurozone economy expanded 0.4% in the third quarter. Of the region’s four largest economies, Spain led the way with 0.8% growth, followed by Germany (0.4%), Italy (0.3%) and France (0.2%). Not much help there.
The voice in the wilderness for the economy bulls continues to be found in the US job market. Initial jobless claims fell 13,000 to 263,000 for the week ending October 3rd, near a 42-year low. The four week moving average, which smooths out weekly volatility, fell 3,000 to 267,000. This evidence of a tightening labor market could be the catalyst referenced above for an eventual move by the Fed.