Acknowledgment that the economy is improving. I anticipate that the weak August payroll report will be revised higher and that inflation should firm. Along with their revised expectation of the path of policy rates, Fed officials seem to be on the same page as me. They acknowledged the broad-based tightening in employment conditions over the past several months as well as today’s stable inflationary conditions, and they released updated economic projections.
Market Realist – The graph above shows the monthly non-farm payroll data. Only 142,000 jobs were added in August, which is less than expected.
Market Realist – The graph above shows how payroll data for August has been revised upwards historically.
Market Realist – The graph above shows the increase in ISM new orders for both manufacturing and services in 2014. The figures for manufacturing are currently at ten-year highs. Services are at nine-year highs. This indicates strength in the U.S. economy.
Market Realist – The graph above shows how inflation data has been firming up in 2014. Both the consumer price index and producer price index have been in an uptrend in 2014. The Fed has kept a 2% long-term target for inflation in the U.S. economy.
A rising inflation affects the U.S. bond markets (BND). Rates rise while the prices of U.S. Treasuries (TLT) usually fall with a rise in inflation. Holding cash is also not a good idea in times of rising inflation. The erosion in the value of holdings would be that much more. You could look at U.S. equity markets (IVV) as an option. U.S. stocks give higher after-tax and after-inflation returns than cash and bonds (AGG) in the long run.
You could also look beyond traditional inflation protection measures such as Treasury inflation-protected securities (TIP), gold (GLD), and silver (SLV) to invest in other options, including technology (XLK), real estate (IYR), and U.S. large-cap equities (SPY).
Read on to the next part of this series to learn about changes in the Fed’s Summary of Economic Projections (or SEP) from June.