June 13: As expected, the Federal Open Market Committee raised its target range for the federal-funds rate by 25 basis points, to 1.75% to 2% today. Less expected was the new guidance for four interest-rate hikes this year, up from three previously. The committee characterized economic growth as “solid,” which was an improvement from “moderate” in March. The details from the meeting show an upgrade to the Federal Reserve’s economic outlook, with a slight increase in 2018 gross-domestic-product expectations and inflation, along with a decrease in the unemployment rate. Treasury yields moved higher, bank stocks rallied, and the dollar rose in reaction. While some investors viewed the commentary by Fed Chair Jerome Powell as more hawkish than expected, we remind those investors that the stock market can continue to move higher along with interest rates at these levels.
— Lindsey Bell
Oil Prices Pause
by Yardeni Research
June 14: There are more pushes and pulls affecting the price of crude. On the bearish side, the shale miracle continues to boost production in the U.S., the Organization of Petroleum Exporting Countries’ quotas are up for debate at next week’s meeting, and Saudi Arabia and Russia have already started pumping more oil. And on the horizon, electric vehicles could weigh on oil demand if they’re broadly adopted. On the bullish side, renewed U.S. sanctions against Iran could lower that country’s production, the dissolving society in Venezuela has crippled its oil industry, and the strong global economy has helped boost demand.
The U.S. Energy Information Administration’s forecast calls for an oil market that’s in amazing balance. This year, it expects worldwide crude-oil and liquid-fuels production of 100.22 million barrels per day, and worldwide consumption of 100.29 mbd. The oil market has already placed its bet: The price of a barrel of Brent crude oil has jumped to $75.88, up 57% year over year. But now it might move sideways for a while.
Protection That Hurts
Boosting or Choking Europe’s Data Economy?
by Talking Point
June 13: Too much regulation—or too little? GDPR, the European Union’s mammoth data-protection regulation, eventually went live on May 25 after a two-year transition period.
There are some who celebrate the GDPR, not unreasonably, as a milestone and global role model for user rights. Fostering individual rights to access, rectify, transfer, and request the deletion of personal data, the regulation essentially gives back data ownership to more than 500 million “data subjects” within the EU rather than leaving it in the hand of the “data controllers,” i.e., the companies that store and process users’ data.
However, the regulation also attracts criticism from both industry representatives and privacy-rights advocates. The former often describe the regulation as too complex and restrictive, as well as creating substantial legal uncertainty for companies. The latter claim that vague formulations and exceptions in the framework, as well as a still relatively high level of discretion provided to national regulators (e.g., when it comes to fines), would weaken the enforceability of the regulation.…Large established companies might find it easier to comply with the regulation than small or medium-size competitors. At the same time, costs of compliance, legal risks, and restrictions on data processing could hamper innovation in Europe’s tech industry. While large U.S. tech players invested substantially in order to comply with GDPR, several small U.S. companies and start-ups already withdrew from the EU market at the end of May against the risk of clashing with the regulation and the impact on their profitability.
Revised Revisions Make Retail Positives Hard to See
by Regions Financial
June 14: Total retail sales rose by 0.8% in May, easily besting the 0.4% increase we and the consensus expected. Ex-auto, retail sales were up 0.9% and control retail sales, a direct input into the GDP data on consumer spending, rose by 0.5%, just ahead of the 0.4% our forecast anticipated. As our regular readers know, we put little stock in the initial estimate of retail sales in any given month, as those initial estimates are prone to significant revision. The initial estimate of May retail sales is no different, as several categories stand out as prime candidates for revision—mainly lower. To be sure, we have been and remain constructive on the state of U.S. consumers, and even ahead of today’s release, growth in second-quarter consumer spending was tracking well ahead of the middling growth seen in the first quarter; we simply see the headline print on the May retail sales report as overstating the case.
Retail sales in May were higher in 10 of the 13 broad categories for which data are reported. Sales at building-materials stores jumped by 2.4%, the largest monthly increase since post-hurricane rebuilding and repair sparked a 2.9% increase last September. Gasoline-station sales were up by 2% in May and are up 17.7% year on year, reflecting higher gasoline prices. Department-store sales were up 1.5%, while apparel stores and restaurants each posted a 1.3% gains. Despite lower unit sales, revenue at motor-vehicle dealers rose by 0.5% in May, while sales at auto-parts stores rose by 1%. On the flip side, furniture-store sales are reported to have fallen by 2.4% in May (the largest decline since December 2013), but this follows the reported 2.7% increase in April, though, quite frankly, neither of these numbers makes sense to us. To our earlier point about the sizable revisions to the initial estimates of retail sales in any given month, that 2.7% increase in sales at furniture stores in April was initially reported as a 0.7% decline, while what was originally reported as a 1.2% increase in sales at building-materials stores is now shown to be a 0.8% decline. These aren’t the only such instances, nor is April the only month in which these patterns turn up in the retail-sales data. And, while today’s report incorporates an updated sample, new seasonal-adjustment factors, and definitional changes in some of the component categories, census released those revisions in late May, and we had the revised data when we prepared our forecast of May sales. So, in essence, the estimates released today incorporate revisions to the revised data, and the numbers will look different upon the release of the estimates of June sales. The reported May increases in sales at apparel stores and restaurants stand out as suspect. Again, though, this is not to cast aspersions on U.S. consumers, who we think are on increasingly solid footing.
—Richard F. Moody
Straight Talk From the Fed
by Alfstad Capital
June 14: Powell is a breath of fresh air that I find so badly needed and so very welcome after the wonkishness and obfuscation of Alan, Ben, and Janet. To his credit, we are getting it straight (though not simple) for a change.
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