Week of November 2, 2015
Despite a pullback on Friday, the markets were able to finish the week in positive territory. The S&P 500 rose a scant 0.2%. The Dow Jones Industrial average eked out a 0.1% gain. And, the Nasdaq Composite moved just 0.4% higher.
A quick reversal of declines shortly after the Federal Reserve announcement on Wednesday led the week into positive territory as investors cheered the language pointing to a December rate hike.
Fed Hints That Santa Will Bring a Rate Hike
Last week the Federal Reserve released a statement after its October meeting. The committee didn’t move rates this month but it strongly hinted that one could be expected in December. The statement reinforced the Fed’s view that the economy continues expanding at a moderate pace and introduced the language “next meeting” into the press release. Shortly after the meeting, the Fed futures market predicted the odds of a December rate hike as a coin flip. This is up from just a 33% chance last week. The debate will rage on until a rate hike actually occurs, but later in the week the Fed reinforced the likelihood of a 2015 move when it released an updated version of its large-scale model on the U.S. economy. The model suggests the Fed lowered the near-term estimate for “potential growth”, or how fast the economy can expand without producing inflation. This implies that resource slack has been used up, and further economic gains could lead to inflation. It should also be noted that the statement eliminated the line expressing concerns about recent global developments.
3Q Brings Slowing Growth
The Commerce Department announced third quarter GDP growth of 1.5% last week, a dramatic deceleration from the 3.9% posted during the second quarter. The slowdown was almost entirely due to a decline of inventory accumulation, a notoriously volatile piece of GDP. This created a 1.4% headwind for the domestic economy as businesses thinned out goods on their shelves. Importantly, consumer spending rose at a 3.2% annual rate, the fifth time in the last six quarters that it has topped 3%. Consumers have not been so happy to open their wallets since 2005.
Source: Wall Street Journal, October 29, 2015 (subscription required), http://www.wsj.com/articles/u-s-economic-growth-cools-in-third-quarter-1446122018
One Child Policy Left Behind
Last week, the Chinese government announced an end to its long-standing and notorious policy of only allowing families to have one child. This restriction was initiated in 1980 in an effort to slow what was then a rapidly growing population. Beginning in 2000, many experts began warning that the country was dangerously close to falling below a replacement rate of two children for every woman. It currently stands at 1.55 down from 6.11 in 1950. China may be known for having the world’s largest population (1.4 billion), but less known is the rapidly rising age of that group. The United Nations projects a near doubling of the number of Chinese over the age of 65 in the next 15 years. This will create a decline in the working age population; a development that could hamper ongoing economic growth.
Source: Wall Street Journal, October 30, 2015, http://www.wsj.com/articles/china-abandons-one-child-policy-1446116462
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Wall Street Journal, October 30, 2015, http://www.wsj.com/articles/china-abandons-one-child-policy-1446116462 sldkjf
Wall Street Journal, October 30, 2015 (subscription required), http://www.wsj.com/articles/chinas-bid-to-alter-demographic-trend-will-be-tough-1446225904
Wall Street Journal, October 29, 2015 (subscription required), http://www.wsj.com/articles/u-s-economic-growth-cools-in-third-quarter-1446122018
Wall Street Journal, October 27, 2015 (subscription required), http://www.wsj.com/articles/u-s-durable-orders-down-1-2-in-september-1445949117
Wall Street Journal, October 29, 2015, http://blogs.wsj.com/moneybeat/2015/10/29/the-fed-speaks-and-the-market-listens/
Bloomberg, October 30, 2015, http://www.bloomberg.com/news/articles/2015-10-30/fed-s-updated-model-of-economy-suggests-it-s-time-to-raise-rates