Market Prepares For Second Half Of 2014

wagesThe second financial half of 2014 begins on Monday in a shortened trading week with U.S. stock markets closed on Friday for Independence Day.

Investors will be paying close attention to June’s employment report scheduled to be released on Thursday July 3rd.

The June employment forecast is for 230,000 non-farm payroll jobs in June, according to briefing.com.

Last week saw brighter economic data for new and existing home sales in May along with rising consumer confidence for the month of June while durable orders for May and the third estimate of U.S. GDP in the 1st quarter of 2014 disappointed to the downside.

The final reading of first quarter U.S. GDP showed a contraction of -2.9 percent, below the forecast of -1.8 percent from briefing.com as much of the country remained in a deep freeze during the first three months of 2014 and business activity declined.

Many economists are expecting second quarter to rebound and sharply rise out of contraction territory.

However, averaged together the first half of 2014 looks to be mostly flat.

“Even with the bounce back in Q2 you average the 2 quarters together and we’ll probably going to have a flat first half. Now the data since then going into the second half of the year is looking well enough for the Fed to still remain optimistic about the growth outlook but it’s starting to get cloudier with prices going up and wages remaining stagnate” said Ellen Zentner, senior economist at Morgan Stanley, when  interviewed on Bloomberg’s Surveillance.

On Thursday the latest inflation data from the Bureau of Economic Analysis for May showed core PCE (personal consumption expenditure) moving higher, rising to 1.5 percent year over year and 0.2 percent for May, reaching a level not seen since October 2012.

The FOMC pays close attention to PCE inflation for its quarterly economic projections.

On June 17th the other key inflation index, CPI (Consumer Price Index) showed in May that consumer prices grew 0.4 percent for the month, higher than the forecast of .02 percent from briefing.com.

Over the past year, the all items index grew 2.1 percent.

Excluding energy and food, CPI rose to .03 percent in May, beating the forecast of .02 percent, marking the largest increase since August 2011.

The Fed’s inflation target is 2 percent.

Rising inflation is an important gauge about the health of the overall U.S. economy.

Inflation is one of the key metrics used along with employment data to shape Fed policy regarding its stimulus program and upcoming decision about raising short term interest rates which remain locked at record lows, barely above 0 percent, but is expected to move higher in 2015, especially in light of better than expected inflation data and monthly non-farm payroll job growth that has been consistently over 200,000.

On June 24th voting Fed member William Dudley, President of Federal Reserve Bank of New York, said from Puerto Rico that the market view of the Fed raising short term interest rates in the middle of 2015 is “reasonable” before admitting that “forecasts often go astray.”

Although inflation is rising and the U.S. economy shows signs of improving, real wages remain flat and future spending levels could be impacted, especially in an environment with gas prices up nearly 4 percent from the same time last year.

Real wages means adjusted for price inflation.

According to the Bureau of Labor and Statistics, from April to May, real average earnings for all employees declined 0.2 percent.

On a yearly basis for all employees from May 2013 through May 2014, real average hourly earnings fell 0.1 percent, seasonally adjusted.

For all private employees in production (non-supervising employees), real average hourly earnings declined 0.1 percent, seasonally adjusted, from April to May.

On a yearly basis, for all private employees in production (non-supervising employees), from May 2013 to May 2014, real average hourly earnings rose just 0.3 percent, seasonally adjusted.

On a chained dollar adjustment basis, which adjusts real dollar amounts for inflation over time, real average hourly earnings are back to the same level that they were in 1968.

-Johnathan Schweitzer

 

 

 

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