The Federal Open Market Committee (FOMC) released its Meeting Minutes on Wednesday, in which it was made abundantly clear that the Fed is in no hurry to raise rates. Federal Reserve officials signaled their willingness to keep interest rates near zero for longer than previously indicated, meaning the first rate hike will likely not be before June. The minutes also hinted at a very gradual increase, once the rate hikes begin. Fed officials cited a stronger dollar and the crisis in Greece as a few contributing factors behind their “dovish” language. The minutes also showed that many officials worried that dropping the “patient” phrase from the statement could lead markets to think a rise in rates would come very soon. While a June rate hike is still possible, we believe that a third quarter rise in rates is more probable in light of the continued near-term weakness in inflation data. The market’s focus will now shift to Fed Chair Janet Yellen’s Congressional testimony next week which could provide greater clarity about the timing and conditions for rising rates.
West Coast Ports All But Shut Down Due to Strike:
The twenty-nine ports on the West Coast are all but shut down, as the International Longshore Workers Union is negotiating with the management of the ports on a new labor deal. U.S. exporters are beginning to feel the pinch, as it is near impossible to get their goods out of the West Coast of the U.S. West Coast orange growers and Washington apple growers are seeing their goods rot as they sit in the ports undelivered. The North American Meat Institute said its industry is losing $85 Million per week as the meat and poultry sit in the freezers. The alternative of shipping through the air or East Coast ports can be expensive and is not always economically feasible. Imports from Asia are also impacted; it is estimated that 70% of U.S. imports from Asia come through the affected ports. Honda Motors said on Monday that it may need to stop production for days if this strike is not resolved. Toyota and Subaru have also stated they may need to alter their production lines, should this continue. Pictures of crowded docks with no workers and incoming cargo ships anchored out at sea paint a picture of how impactful this has the potential to become.
The interesting thing about this is that this strike may actually increase the GDP number, albeit artificially, due to how exports and imports are counted. Exports are counted as soon as they are within reach of a crane, regardless of whether or not they leave the U.S. However, imports are not counted until they are offloaded into the U.S. Therefore, during the strike, it will appear that there are more exports than imports, thus artificially raising that aspect of the GDP number, even though both are being held up.
Industrial Production rises in January:
Industrial production rose slightly last month, though not enough to offset December’s decline, suggesting that U.S. factories are off to a slow start in 2015. The Federal Reserve said that industrial production, which measures the output of U.S. manufacturers, utilities, and mines increased 0.2% in January after decreasing 0.3% in December. Overall, industrial output in January was up 4.8% from a year earlier. Capacity utilization, a measure of slack in the industrial sector, held steady at 79.4%, which is slightly below its long-term average. The data combined with the latest ISM factory survey suggests that U.S. manufacturing is cooling off after a robust 2014 as a stronger dollar and a soft global economy has weakened demand.
Eurozone Agrees to Extension of Greece Bailout:
A few hours ago, the eurozone approved a four month extension on Greece’s bailout, provided that Greece submits its reform and budgetary measure details by Monday. Although Greece had requested a six month extension, the four month extension strengthens Greece’s hand in its ongoing negotiations with its creditors. Overall, the deal is designed to keep bailout funds flowing into Greece, basically buying Greece more time to work with its creditors. We will keep you updated as this story progresses.
Housing starts slow in January:
Builders broke ground on fewer U.S. residential projects last month as demand for single-family homes cooled from almost a seven-year high in December, highlighting that the housing recovery remains uneven. The Commerce Department said that housing starts declined 2% in January to an annual pace of 1.07 million units, reflecting a 6.7% drop in single-family projects. New applications for building permits, which are a bellwether for future construction activity, also slipped 0.7%. Despite last month’s decline, housing starts are still 19% higher than a year ago, suggesting that the housing market recovery is continuing to make gradual progress. The two month average, which is a more effective way to gauge the housing market, shows that the housing market is still improving.
Tax Deadline Items:
While so many of us want to get our taxes done and over with, please verify that you have received all items before filing your tax return. Some documents are taking longer than in the past to be sent out. Form 1099s from TD Ameritrade were recently posted on their website and should be arriving in the mail soon. For anyone who owned a limited partnership in their investment accounts you should expect a K-1 by mid-March.
Tax time is also a good time to consider adjusting withholdings if you normally receive a significant refund in taxes. Victims of tax fraud often have to wait six months before their case is handled and therefore do not receive their refunds until their case is settled. Thus it is beneficial to consider minimizing the amount of refunds you will receive in the event you do become a victim.
As a reminder, the contribution limits for qualified retirement plan accounts increased for 2015. Contribution limits to 401(k), 403(b), etc. accounts are now $18,000, up from $17,500 in 2014, and for those over the age of 50 you can contribute an additional $6,000, up from $5,500. IRA contributions limits remain at $5,500 with a catch-up for those over 50 of $1,000. Taxpayers still have until April 15th to make contributions to IRA accounts for 2014.
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