- Jerome Powell was sworn in as the 16th chairman of the Federal Reserve on Monday, February 5. He was greeted with a 1,100 point drop in the Dow Jones Industrial average on his first day; the market’s reaction to news of greater than expected wage inflation data. It isn’t clear yet how Chairman Powell will run the Federal Reserve; however, the consensus is he would continue with former Chairperson Yellen’s policy of small interest rate hikes at a measured, data dependent, pace.
- Market expectations at the beginning of the year for up to three one-quarter percentage interest rate hikes in 2018 increased in the direction of a fourth rate hike when Chairman Powell’s first Semi-annual Monetary Report to the Congress (known as Humphrey Hawkins testimony) sounded a bit more hawkish than expected. Chairman Powell stated: “We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more simulative.” The Fed is expected to raise interest rates again in March.
- The second read on fourth quarter gross domestic product (GDP) came in a bit weaker than the initial read but relatively strong nonetheless. Fourth quarter real GDP was revised down 0.1 percentage point to 2.5% (annualized). Excluding international trade and inventories GDP rose 4.6%, the best reading since the third quarter of 2014.
- Housing data has softened in the past two months although some of the weakness may be due to weather. The National Association of Realtors (NAR) said its Pending Home Sales Index (PHSI), a forward looking indicator of existing home sales, fell 4.7% in January to its lowest level since October 2014 and 3.7% below the level in January 2017. December was also revised-down. The index, which is based on contracts to purchase an existing home, had been expected to rise in January. NAR chief economist Lawrence Yun commented on the unexpected fall, “…last month’s retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates.”
- Personal income rose a larger-than-expected 0.4% in January following a similar gain in December. Excluding direct tax payments, Personal disposable income rose an even stronger 0.6%; this was the largest increase since December 2012. According to the Bureau of Economic Analysis (BEA), the gain partially reflected the reduction in taxes from the Tax Cuts and Jobs Act (TCJA) passed in late 2017. The Atlanta Fed currently expects consumer spending to contribute about 2 percentage points to first quarter growth. Some are concerned that the low savings rate may be contributing to consumer spending but may not be able to continue indefinitely. The savings rate did rise in January to 3.2% for the first time since May of last year.
- Consumer confidence as reflected in the Conference Board index jumped 6.5 points to 130.8, the seventh increase in eight months, the largest increase since March and the highest level since November 2000. The University of Michigan index rose 4 points to 99.7, its highest level since January 2001.
Sources: Bloomberg LLC, U.S. Commerce Department, Bureau of Labor Statistics, EIA, Dow Jones Inc., MarketWatch, Standard & Poors, Federal Reserve Bank, Financial Times, FactSet, State Street Global Advisors, Mortgage News Daily
* This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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