Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 9/15/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 9/15/14.
Alibaba and the Fed Snatch Headlines
If you’ve read any financial articles this week there is a good chance that the topic centered on one of two events: the highly anticipated Alibaba IPO or the Federal Reserve’s upcoming FOMC meeting. Despite the amount of interest Alibaba has garnered recently as it readies itself for its debut on the NYSE on Friday under the ticker symbol BABA, we remain focused on the economic data leading into Tuesday and Wednesday’s FOMC meetings in addition to Wednesday’s Fed policy statement.
While many economists and some Regional Fed Bank Presidents believe that the U.S. economy is ready for higher rates, Yellen has warned that low wage growth and slack in the labor market allow for an environment of continued accommodation. So, despite the importance of the actual timing of the first interest rate hike, perhaps more important is the path the Fed takes and the level to which they are willing to increase interest rates. A recent Bloomberg survey found that while there is a wide consensus that rates will ultimately begin to rise in 2015, 57% of economists expect the median estimate for the federal funds rate at the end of 2015 to remain near 1.13 percent, indicating a slow and steady rise in rates.
This should be put in context of the Fed’s current target federal funds rate projection of 2.25% by the end of 2016. Janet Yellen made it clear after the March FOMC meeting that the future path of interest rates is data dependent after abandoning the two pronged approach of focusing on the unemployment rate and inflation expectations. Although the Fed has broadened their focus to include information beyond the unemployment rate and inflation expectations, these two measures remain important factors in measuring the health the U.S. economy and its ability to tolerate higher rates. Currently, the unemployment rate stands at 6.1% (below the 6.5% target Bernanke initial set in 2012 for considering raising rates) while the PCE Index, the Fed’s preferred inflation measure, increased at an annual rate of 1.6% in July from a year ago, below the committee’s 2.0% goal (full release here).
We have contended that the first rate hike will likely come approximately six months after the end of the tapering process, which, we expect to occur in October. This would allow for the first increase in rates to occur during the April FOMC meeting. The effect of rising interest rates has been the focus of both equity and fixed income investors for some time now due to the ripple effect the rates will have across financial models and asset pricing. While the week’s hottest topic may be whether or not Alibaba will be the largest IPO in history (overtaking The Agricultural Bank of China’s 2010 IPO when $22.1B was raised), insight into the future of U.S. monetary policy and the associated longer term market implications will come out of the Fed’s policy statement on Wednesday.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.