Uncertainty about a June rate hike by the Federal Reserve Board triggered the latest round of selling on Wall Street, leaving the Dow Jones Industrials closing May 6 at 17,740, about 700 points from its May 18, 2015 high of 18,312. Recent jobs gains left Federal Reserve Board Chairwoman Janet Yellen looking to hike rates for the second time since Dec. 15, 2015. Former Fed Chairman Ben Bernanke dropped rates to zero percent Dec. 15, 2008 to prevent the financial crisis from morphing into another Great Depression. Eight years later, the U.S. economy still struggles with a Gross Domestic Product running less than one percent, cautioning Yellen about hiking rates. While the unemployment rate held steady at five percent, the Labor Department reported May 6 that the nation created only160,000 non-farm payroll jobs in April, down from the 260,000 produced in March.
Former PIMCO co-CEOs Bill Gross and Mohamed El-Erian see Yellen defying economists, hiking rates at the June meeting of the Federal Reserve Open Market Committee [FOMC]. “I’m not sure that June is out,” said Gross, now running Janus Global Unconstrained Bond Fund. “Yellen, more than jobs, is focused on wages. At 2.5 percent, they’re moving up.” Gross’s former co-CEO El-Erian, concurred that another rate hike was on the way. “I do think they’ll hike at least once, and they could hike twice this year,” said El-Erian, forgetting the global economic slowdown, especially in China and Europe. Ten-year Treasury bonds fell after Yellen’s Dec. 15, 2016 rate hike, closing Friday at 1.78 percent. Whether wages climbed year-over-year to 2.5 percent, the current slowdown in China and Europe could get worse if Yellen decides it’s time to start raising rates in June.
Falling 1.8 percent year-over-year, Chinese exports look weak heading into the second quarter. Dropping Chinese exports directly relates to problems in global demand, especially from the U.S. and Europe. “Both exports and imports came in weaker than expected in line with the soft trade performance across Asia, pointing to another challenging year for emerging markets,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore. Exports to the U.S. fell 9.3 percent in April, year-over-year, signaling softer demand in the U.S. for Chinese goods. When Yellen considers what to do at the next FOMC meeting, she’s not going to ignore global economic pressures to keep the spigots running. Tightening credit could crate a cash-crunch for companies looking to expand imports, causing layoffs due to sluggish demand. Yellen can’t ignore global economic trends.
Selling off some 500 points from the Dow’s April’s high, Wall Street looks carefully at the Fed’s moves to discount share prices. Just hinting at more rate hikes pushes funds to sell shares, something that could trigger more sluggish GDP growth. If traders go short and Wall Street sells off, it could trigger a new recession with the GDP close to flat-lining in April. Despite the 5 percent unemployment rate, it doesn’t account for the Labor Participation Rate, that dropped in April to 62,8%, three percent lower than in the 2009 Great Recession. When Yellen convenes the FOMC in June, she’ll look more at wage gains, year-over-year. If trends hold in China in Europe, the contagion’s going to hit the U.S. in 2017, something predicted by business tycoons Sam Zell and George Soros. With inflation flat, the real worry in a recession-prone economy is deflation, when consumers stop spending.
Watching the jobs picture tick downward in April indicates that global economic weakness has started to hit U.S. shores. Slowing demand in the U.S. and Europe hurts China export and import business, closing factories and laying off workers until global demand picks up. When you look at global geopolitical forces, especially Syria’s runaway refugee crisis hurting the European economy, there’s no end in sight to Europe’s economic woes. Lower demand in the U.S. also continues to hit China’s bottom line, creating slow growth for the foreseeable future. PIMCO CEO Mark Kiesel expects more Fed rate hikes but can’t say when. International Monetary Fund Managing Director Christine Lagarde urged Yellen to go slowly with rate hikes, given the refugee crisis, prolonging Europe’s sluggish economy. Before Yellen pulls the trigger in June, she’ll need to see growing U.S. consumer demand.
With propaganda flying during an election year, it’s difficult to get good read on the economy. Republican presumptive nominee real estate tycoon Donald Trump sees the whopping U.S. debt hampering 2016 U.S. growth. President Barack Obama keeps pointing to the 5 percent unemployment rate but can’t account for slow U.S. GDP growth. If Wall Street starts to sell off, second quarter GDP growth could dip into recession territory. Yellen doesn’t want to push the U.S. economy into recession, something that could trigger another round of quantitative easing or bond-buying, something the European Central Bank continues to do. “The market has to prepare a little bit for the downside risk in other Chinese data and some sort of market correction might be inevitable,” said Zhou. More selling in the Chinese stock market could trigger a global recession.
