June Economic Outlook
This is a monthly newsletter by Greg Sweeney, CFA, Chief Investment Officer, at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 25-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- The next Federal Reserve meeting is scheduled for June 22. We do not expect the Fed to change its position on the current rate, leaving it between 0 and 0.25%.
- The year-over-year consumer price index (CPI) is 3.2%. There is still talk about how the price index increase is temporary, but look for it to continue higher for the next couple of months. We estimate the next release of data to show 3.5% inflation.
- In the past, we have written about the three ways to get out of debt: (1) inflate, (2) pay it off, or (3) default/restructure. With this in mind, it is interesting to watch what is happening in Greece. Since Greece participates in the European Economic Community (EEC) and uses the euro rather than its own sovereign currency, inflation is really not an option for them. The next most palatable option is to pay off the debt. Bailouts on top of bailouts are proposed for the country, with seemingly little attention directed toward the low probability of successfully growing out of the problem. How long will it be before the restructuring option surfaces as the remaining solution, and what will that do the financial system in the region? Also, which country is next, and what will the U.S. learn by watching progress in Europe?
- S&P placed the Untied States on watch for a downgrade in April. Moody’s did the same thing in late May.
- External influences—the Federal Reserve holding short rates near zero, open market purchases of Treasury bonds through quantitative easing programs and trillion dollar deficits to keep money flowing into the economy—are camouflaging some economic signals. All is being done in the name of keeping the economy going; yet employment is still 7 million below its December 2007 peak. In fact, employment today, at 131 million people, is no higher than it was in 2003, even though the U.S. population has grown by nearly 30 million people.
- For the first time since 1981, median monthly rent is higher than median monthly mortgage payments.
- Commodities could come under pressure if China is successful in slowing its rate of growth to more manageable levels.
- Last month, we mentioned that the real after-tax return on 10-year Treasury bonds was negative. Today, it is negative without even considering taxes. The 10-year Treasury yield is 3% and the current inflation rate is 3.2%. It is very hard to get excited about a 10-year investment that doesn’t even pay enough to keep up with current inflation.
- Savers and investors are being punished by these external influences aimed at keeping interest rates low. The punishment does not look like it will end soon.
- New bond offerings, even high yield offerings, are surging. This suggests that corporate treasurers feel interest rates are favorable and will likely be higher during the term of the bonds being issued.
- The stock market appears to be losing a bit of momentum in the face of recent economic news. We would not be surprised if the market tests the 1250 level on the S&P 500 during June.
- Even though volatility is surfacing on stocks, the bond market alternative (mentioned above) is not very attractive, and neither is cash.
- If investors are concerned about the stock market, perhaps it is a call to review overall portfolio allocations.