I wish they were all this way, but this has been one of those weeks when there have been so many interesting events and stories that I am having a difficult time deciding which one to write about. Confronted with this veritable smorgasbord of topics, I have decided to touch on several as almost every one has created market reaction, particularly for markets that are currency sensitive.
The least of these but one I find rather interesting is the scandal that has unfolded at FIFA, the world governing body for international soccer or futball as the rest of the world refers to it. I recognize that, while growing, this is still not a wildly popular sport in the United States, but it dwarfs every other sport on a global level and it has been controlled by a very tightknit group of men. Just as a comparison, it is estimated that around 167 million people tuned in for at least a portion of the last Super Bowl and many of them probably to watch the commercials. Compare this with the men’s final for the last World Cup where it is estimated that there were more than 1 billion people watching. That is big business and evidently rife with bribes, kickback and cronyism, FIFA is now being forced to begin making a few changes at the top. This reorganization doesn’t have a huge bearing on the economy, but it is a great reminder of how corruption can seep into an organization.
Second on the list this week is the ancient nation of Greece who is once again pressing up against deadlines to make debt payments and threatening to default. This reminds me of one of the lesser talked about Greek goddesses, Nemesis. She was regarded as the spirit of divine retribution who could bring much sorrow to mortals, and it would appear that the leadership of that nation has decided to channel her life-force in an effort to seek vengeance on the European money-changers who evidently forced them to borrow far beyond their means. Concerns about the looming repayments has pushed the U.S. Dollar sharply higher over the past week or so but then news of a new and improved bailout package sent it tumbling lower for a few days and commodity markets have zigged and zagged with the swings as well. The latest has Greece pushing back the 300 million Euros that were due this week and combining it with at additional 1.5 billion Euros that are due at the end of the month in a single payment. Of course the immediate question that pops into mind is that, if they cannot make the first installment, how on earth will they be able to make one that is six times larger in just a few weeks? I guess only the (greek) gods know the answer to that. Regardless, until a fix is put into place that will at least kick the can down the road a bit further again, I suspect the currency trade will remain quite volatile.
Next up is the U.S. Trade gap, which shrank by 19% in April, the most in over six years. Imports decreased 3.3% to $230.78 billion while exports were up 1% to $189.91 billion. If you recollect, trade was disrupted earlier this year due to the port strikes on the west coast, so some of this could be attributed to a game of catch-up as we moved a backlog of container goods. But keep in mind that the export of services set a record for the month as well and the trade deficit for petroleum was the lowest since March of 2002. Overall this has to be considered a positive sign for continued improvement in the overall health of the US economy.
The hope of a positive sign might already be reflected in the next reports. First, in the regularly released Beige Book of Economic Indicators published by the Fed, it was reported that 7 of the 12 districts experienced modest or moderate economic growth and respondents were generally optimistic about the future. This would appear to reinforce the belief that the sluggish GDP numbers posted in the 1st quarter were heavily influenced by the harsh winter weather. That provided a great segue into the employment data that was released just this morning. During the month of May, the U.S. economy added 280,000 new jobs, which was far in excess of the expected 225,000. In addition to that, March and April jobs numbers were adjusted up 32,000 and wages increased 8 cents, which is 2.3% over a year ago. The unemployment rate actually ticked up 1/10th to 5.5% but that is actually a positive sign as it reflects more people trying to enter the workforce.
The first couple stories aside, the reports and data released this past week would be indicative of a strengthening economy, which leads to the next logical question; when will the Fed make to first boost in interest rates? It seems that everyone has an opinion as to when that should happen including those outside of the United States. This week Christine Lagarde, managing director of the International Monetary Funds, urged the Fed not to raise interest rates at least until some time in 2016. Reading this reminded me of a comment a friend made a few years ago. At the time he had just moved into the chairman role of a major sports team and when I asked him how the transition was going, he replied; “It is amazing how much assistance I have received in the form of recommendations, some of them even solicited.” There is no question as to the leadership role and influence the U.S. has in the world economy and that decisions have global implications, but I suspect the legions of economists and governors within the Federal Reserve System are capable of soliciting Ms. Lagarde’s council when needed. Despite her recommendations, talk in the U.S. seems to favor a possible rate hike as early as September.
I propose the bigger question; at this point is delaying a hike any longer really going to benefit the growth in the economy? Momentum appears to be in the right direction and corporate profits in the United State have approached 50-year highs with net margins reaching 9.4% in the third quarter of last year for S&P 500 companies. If keeping interest rates would incentivize companies to invest in expansion, then by all means keep them low. But it would appear that these earnings are still being used to buy back shares and for mergers and acquisitions. Investment as a percentage of operating cash flow has fallen from 29% to 23% over the past five years and in the month of April alone, S&P500 companies set a new record spending $133 billion for share buybacks and dividends and it is projected this number could reach $1 trillion this year. Additionally, mergers and acquisitions are growing at a blistering pace and in May set a new domestic record of $243 billion and globally $1.85 trillion so far this year. As I commented, if the zero interest rate policy were stimulating investment in business expansion, great, but it would appear to me that at this point it is doing little more than artificially inflating equities and a few other assets.