Jackson Hole Will Signal Hawkish Tone for Financial Markets
By EconMatters
Jackson Hole Agenda
2nd QTR GDP 4%
Well this week we finally put that argument to rest as the first look at second quarter GDP came in at a robust 4%, with the first quarter being revised up from a negative 2.9% to 2.1%, so the economy basically grew at a 2% rate for the first half of the year with one of the worst winters on record, and the working off of 2013 inventories. This bodes well since the US economy, being a highly consumer driven economy, really kicks into high gear the second half of the year. A lot of this is based upon the Fall Back to School Spending cycle, companies needing to spend budgeted money or lose it, Tax Spending, the Holiday Shopping Season, the ramp up of college and pro sports football season, and milder weather conditions in the bulk of the country. In short, 2014 will grow at a faster pace than 2013 when all is said and done!
Employment Cost Index 0.7%
So the CPI, PPI, and other inflation metrics in the various manufacturing and services reports are all signaling higher inflation it should be no surprise given a Fed Funds Rate between zero and 25 basis points since 2008, and now that the economy is actually producing jobs, and the labor market is tightening fast, that wage inflation is starting to perk up, and this is the next shoe to drop in the economic cycle.
The Fed is Behind the Curve
The Federal Reserve is already behind the curve, this is obvious as at no time in our history has the economy performed on this level with rates basically being held at ‘end of the world’ total meltdown levels! Sure Wall Street wants free money from Central Banks, this has been the easiest money making era of their lifetimes; now that rates will rise, they actually have to learn to differentiate between asset classes, companies, and investment strategies. This was what changed this week, these two important data points on GDP and Inflation put the nail in the ‘Free Money for Life’ coffin, and this sent shivers up the spine of financial markets!
Market Turmoil
The musical chairs game has already started in the high yield credit markets, the primary dealers are already signaling to the bond market that they don`t want to hold this paper, expect bond funds to finally get the message like the stampeding elephants that they are, and equity markets to start modeling valuations with a normalized borrowing cost for capital as interest rates rise early in 2015.
Hawkish Speech Outlining Turn in Monetary Policy
Look for a speech on Friday August 22nd by Janet Yellen where she officially signals the end of the ‘recession era’ ultra-dovish monetary malaise of the last 7 years with a more hawkish tone to signal to financial markets that they better start finding their respective chairs before the low interest rate music stops playing entirely.
