This week's Federal Reserve policy meeting was yet another
nonevent as expected. In fact, recent economic data has taken a definite turn
for the worse including:
A surprisingly weak September jobs report, including
downward revisions to job growth in previous months. Dismal manufacturing data that has spread to every region of
the U.S. And this week's shockingly bad report on new home sales, which plunged
15% month-over-month to the lowest level in almost a year.
The downbeat economic data is pushing the likelihood of a
Fed interest rate increase further and further into the future. In fact, if you
take a closer look at the market's own assessment about the likely path for the
Fed funds rate, you'll see that nobody expects the Fed to raise rates anytime
soon.
The probability of the Fed hiking rates in October plunged
from a 45% chance just four months ago, to just a 4% chance as the Fed met this
week! And the odds of a rate increase by
March 2016 are barely more than 50/50 at this point, down from a nearly 90%
chance just four months ago.
That's because, as I mentioned at the outset, recent
economic data has taken a decisive turn for the worse, which tells me the
recent stock market rally is simply not sustainable.
While the Fed is supposed to base its policy decisions on a
balanced assessment of the economic data, especially jobs and inflation, you
can bet that Yellen and company are nervously watching corporate sales and
profit results too.
Recently in Money and Markets (see: Can Stocks Survive the
Earnings Recession of 2015?) I wrote
about dismal prospects for third-quarter earnings. In fact, nearly half of S&P
500 companies have reported results so far and profits are on track to decline
about 3% year–over-year.
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As usual, most companies are beating lowered expectations,
but not by enough to make year-over-year earnings growth positive:
While 77% of companies have reported profits above estimates,
only 43% have reported top-line sales above expectations. The biggest culprit
being cited by many companies to explain away the sales shortfall is the strong
dollar, which is a major drag on overseas sales and profits.
And that's another good reason why the Fed is so reluctant
to begin raising interest rates. Central banks globally have cut interest rates
more than 500 times since 2008.
With the entire world easing monetary policy now, a Fed rate
hike would send the dollar on another parabolic move higher, crushing corporate
sales and profits even more.
The U.S. economy is in a precarious situation right now.
Deflationary forces have reduced global growth, cutting into U.S. industrial
exports, which in turn is hurting profits.
U.S. industry is contracting at an alarming rate, as you can
see in the graph above, where ALL five of the Fed's regional manufacturing
surveys for September AND October came in below zero — meaning widespread
contraction in factory orders and
current production.
U.S. manufacturing hasn't been this anemic since the last recession
in 2009. In fact, it's even worse now than during the global growth scare in
2011. And in 2011, the S&P 500 declined nearly 20% in just a few months!
If corporate profits end up falling again this quarter, as
they are now on track to, it will be the second consecutive quarter of slumping
profits for corporate America. In other words: a "profit recession."
And that hasn't happened since 2009, when the Great Recession
was just ending.
The fact is the Fed has never before hiked interest rates during
a profit recession, which is another reason why the chances of a Fed rate hike
should keep falling for the foreseeable future. Good investing, Mike Burnick
Source:
Money and Markets
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