Fed Poised to Resume Rate Hikes

Stocks sank at the open today, selling off alongside bonds. The S&P 500 is currently down 1% and the Bloomberg Aggregate Bond Index is off by about .4%. The big fear du jour is that the Federal Reserve will soon restart interest rate hikes.

Minutes from the Federal Reserve’s last policy meeting were published yesterday. And while there was broad agreement to forego an interest rate hike in June, nearly all Fed officials think further hikes will be necessary to rein in inflation. Bloomberg News says 16 of the 18 policy meeting participants expects at least one more rate hike this year because “economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the…2% objective over time.”

Today’s raft of economic data cemented this view. Payroll processing firm ADP estimates the US economy generated another 500,000 new jobs last month compared with about 225,000 expected. So although layoffs and new unemployment insurance claims are trending modestly higher, it still appears that the supply of labor can’t meet demand. According to the Bureau of Labor Statistics, we’ve got 9.8 million job openings. In yesterday’s market update I pointed out weakness in manufacturing, but the much larger service sector is doing pretty well. The Institute of Supply Management’s Services Index popped to 53.9 last month from 50.3 in May, suggesting a reacceleration in business activity. The report showed improvement in hiring, as well as lower cost inflation.

General Motors and Toyota just confirmed strong demand for automobiles. GM’s US vehicle sales shot up nearly 19% during the second quarter (vs. the year-ago quarter). Sales have been improving throughout the year on the back of strong demand and improving global supply chains. GM said retail auto sales are up 15% through the first half of the year, with fleet sales up 30%. Toyota sales increased by 7% during the quarter and the company says that despite higher auto loan rates, it hasn’t had to offer discounts. Research firm Edmunds says pent-up demand will push US auto sales significantly higher this year.