Brouwer & Janachowski

The Fed made its long awaited increase last week. We think it’s a mistake. The statement was muted and talked about “further improvements” here and there. The only improvement we have seen is in the labor market but, as we mentioned, scratch the surface and it’s not a great picture. At the risk of flogging this to death, we would make two points.

Quiet week for the Fed’s “data dependency”. But what we saw was not good.

The November payrolls reported 211,000. That's enough for a mid-month rate rise of about 25bps. The Fed wants to raise rates. They believe employment is at equilibrium and inflation under control. But neither is correct. To repeat: employment growth in the post 2009 period has been way below past cycles and with an expanding work population. So either people don't want to work, are aging or the U.S. job machine is broken.

All three major central banks held policy meetings in October and recently published minutes. Here’s what they said.

The market was strange last week. No real direction in credit or equities. The Fed turned from mildly dovish to decidedly hawkish with several Governors advocating the December rate rise. It's like watching a debate team convince themselves that they are absolutely right, so let’s do it right? All with me? There were also announcements of new Fed governors. Next year’s voters are more hawkish which means we’ll hear less about “one and done” and more about stepped increases through 2016.

We finally got the Nonfarm Payroll number we wanted: 271,000 new jobs in October, the highest of the year and the lowest unemployment rate since April 2008. The market now puts the probability of a December rate rise at 75%, which is where it was in August. The 10-Year Treasury note climbed 10bps to 2.32% and the 2-Year by 8bps to its highest level all year. Another sign was the fall in long-term unemployment.

We’ve said this many times before, but this is a good time to remember diversification.

The world’s most persuasive central banker, Mario Draghi of the European Central Bank (ECB) , announced no rate changes last week. The overnight rate remains where it was a year ago, at -0.2%. Yes a negative rate. It is not alone. The Swiss overnight rate is around -0.74% and the US Treasury recently issued one month bills at 0% (it is not allowed to sell bills at negative rates). But the Euro area has a bad combination of low growth at around 0.4%, low inflation of -0.1%, unemployment over 10% and a larger current account surplus than China, Japan or Saudi Arabia.

The markets remain Fed led. The theme this week was that we will not see a rate increase until 2016. Why? Well, Federal Reserve board members rarely speak with uniformity. But on Monday, a closed day for the bond market, Governor Brainard delivered a stinging rebuff to the “December, when the economy is at full employment” position with a clear description of the asymmetric risk of lifting rates too soon versus too late.

Central Banks struggle to make sense of it all. The big three (The Fed, the European Central Bank or ECB and the Bank of Japan) released minutes last week. Japan’s QE is equivalent to 15% of GDP. Even QE3 in the US rarely exceeded 6%, but it at least moved the economy forward. The Japanese economy is stuck at around 0.9% growth. So they left rates at 0.1%.

We had truly bad job numbers this week. The rate of new jobs created came in at 142,000, way below expectations. It is true that the BEA often revises these numbers up but that tends to be in an upswing. We are not in an upswing.

Last week, two company stories showed that markets are not always about GDP, growth, inflation and macro economic indicators people (including us) like to talk about. First, Volkswagen (mission statement “…to offer… safe and environmentally sound vehicles”) admitted that well, yes, it had duped emission testers with some clever software. VW employs half a million people and accounts for 4% of the German stock market.

It is rarely a good moment when the Fed makes the Today show. It’s usually too esoteric a subject first thing in the morning. Most people, including us, thought they would raise rates for the first time since June 2006 by around 25bp. They did not. Here’s why and, more important, what it means for your investments.

Wasps, traffic, reruns, back to school, shark sightings and market corrections. August is fast losing its laid back reputation. The S&P 500 is down around 4.5% for the month and 6.2% from May’s all time highs.

Ouch! August is often a month of surprises. In 2011, the S&P 500 lost nearly 7% at the height of the European debt crisis (yes, it’s been going on that long). In 2013, the NASDAQ closed for three hours sending stocks into a mini tailspin. This week’s “I didn’t see that coming” was the devaluation of the Chinese renminbi by nearly 3%.