Future Domestic Monetary Policy
On September 20-21, the Federal Open Market Committee (FOMC) will meet in Washington to discuss the US economy and contingent policy. According to Bloomberg, there is a 20% chance of a rate hike this month (Spalding). While bond traders are pessimistic about an increase in short term rates this month, Yellen has indicated positive economic conditions in her speech in Jackson Hole. From the macro-economic indicators presentenced over the past couple of weeks, monthly lagging and coincidental indicators have created a distorted picture in some economists’ eyes. According to Wells Fargo Senior Economist Mark Vitner, “Hours and wages have been weak over the past month. The Fed is more inclined to wait for more data. They don’t want to surprise the market. Quarterly and yearly data will indicate strong signs by the end of the year” (Vitner).
Looking along the lines of long term federal monetary policy, there are indications pointing towards more “exotic” ways in supporting the economic activity. In the United States, the fed decided to lower short term interest rates while buying longer term notes (Federal Reserve Bank). This traditional easing is intended to flatten the yield curve to achieve target inflation. On the other side of the world, the Bank of Japan (BOJ) has decided to do the opposite by selling longer term notes and buying shorter term notes (Anstey). This is called a reverse operation twist. The BOJ has had deflationary pressures on their economy, so they are attempting to steepen the yield curve to create inflation. If this effort works in Japan, it would not be surprising to see other central banks adopting this policy to increase economic growth after all of the quantitative easing.
Slowing Production in China
The current ‘factory of the world’, i.e. China, continues to see slower growth. Over the past 20 years, Chinese monthly production expanded well over 10-15% year/year, but has declined to levels hovering around 5-6%. The growth in industrial production for August was 6.3% (Trading Economics).
Another indicator provided by the Chinese bureau of statistics shows a flattening and/or decreasing trend in cement production (graph below) from its peak in 2014. Although there is a seasonal recognition to the data, the spring and summer months decreased year over year. The reported cement production amount in July 2016 was 214.1 million tons (Trading Economics). Historically peak cement production months tend to be in the fall, and this will be interesting to see if there will be greater capacity this fall.
Compiled by the Camelot Portfolios Investment Committee
Darren Munn, CFA, Chief Investment Officer
Sarah Berndt, Portfolio Manager
Eric Kartman, Research
Drew Steinman, CPA, Trader/Research
Frank Echelmeyer, MBA, CKA®, Advisor Consultant
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