Last Friday (May 22, 2015), U.S Consumer Price Index (CPI) report for April was released and it was in line with expectations. CPI increased a seasonally adjusted 0.1% in April and core-CPI (excludes food and energy) increased 0.3%, largest since January 2013. CPI reflects what people pay for goods and services. It’s an important indicator for inflation. The Federal Reserve watches inflation numbers closely, to determine the health of the US economy and whenever to raise interest rates.
Over the past 12-months, CPI declined 0.2% (biggest year-to-year drop since October 2009), largely due to the plunge in energy prices (energy index), which fell 19.4% over the last 12-months. However, core-CPI (which excludes food and energy, the violent categories) increased 1.8% over the last 12-months.
The positive inflation report may suggest that the Fed may not be that far away from raising interest rates. Stronger numbers gives a sense of relief that the US economy is pulling itself out of a slump that dragged growth down to 0.2% (GDP report previous post) in the first quarter of 2015. However, the inflation is far below the Fed’s 2% target.
The positive change in core prices was driven by rising costs for housing, medical care, furniture, and vehicles, while clothing and airfare prices declined. Fall in the oil prices led airplane companies to lower their airfares, to complete with competitors. I believe clothing and airfare prices will start to rise soon because summer is here. In the summer, people tend to travel more often (demand increases), pushing prices up. Oil has rebounded to the range of $60, as oil inventory decreases.
The dollar rose after the CPI report. The greenback (the dollar) gained almost 1%, rising to a highest price level since late-April. US markets were flat on Friday after both the Dow and the S&P 500 hit new records this week.
According to Federal Open Market Committee (FOMC) meeting minutes released last Wednesday (May 20, 2015), FOMC expects inflation to gradually rise as the labor market improves and transitory effects such as low oil prices fade away. They believed that there would not be enough information of overall health of US economy to start raising rates at their next meeting in June. The next policy meeting takes place on June 16 and June 17.
Chances of rate hike in June are very low, but the door is not closed. If the next non-farm payroll and Prelim GDP (Gross Domestic Product) (Friday, May 29, 2015) comes out very positive, the Fed will likely raise the rates. Prelim GDP is the second estimate of the last quarter. If you want to know more about the first GDP estimate of the last quarter, click here.
As to trading, I would go long on the dollar and short EUR/USD. Why would I short EUR/USD? Recently, EUR/USD rebounded all the way to above 1.1450. As of right now, it’s around 1.1000. The recent rise in EUR/USD is an opportunity to go short.
News: First, I believe the U.S economy will rebound and future US economic reports will be positive, sending USD higher. Second, I believe Greece will default and eventually leave euro-zone (Greece exiting euro-zone is also known as “Grexit”), which will plunge Euro. Current Greece headlines are just background noises, until we know for sure that Greece will be staying or not.
Technical: If you look at 1-HOUR chart of EUR/USD, you can see that EUR/USD broke a strong support level that used to be resistance. If you look at WEEKLY chart of EUR/USD, you can see that there is a Bearish Engulfing Pattern. Technical seems to be bearish.
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Last Friday (May 8, 2015), non-farm payrolls report was released and it was in-line with expectations. 223,000 new jobs were added in April, and the unemployment rate fell by 0.1% to 5.4%, the lowest level since May 2008. While, this is a good news. March gains was revised down to 85,000 from the prior estimate of 126,000 (-41,000), lowest since 2012. I believe the April number (223,000) will also be revised lower.
Wage growth remained modest. Over the past 12 months, average hourly earnings have increased by 2.2%. As unemployment rate falls, wages should start to pick up speed, which also will push up inflation.
Fed officials are closely watching the labor market and other key economic reports, as they are in a tough spot on raising short-term rates, which have been held near zero since December 2008.
There is a very little chance of rate hike in June. I believe the Fed won’t hike the interest rates, unless over 350,000 jobs are added in May and unemployment rate goes down by 0.2% to 5.2% (which certainly will not happen).
First quarter was very weak due to; strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. When these four are combined together, it creates a heavy roof to push down economic growth.
Hiring has been strong in many industries, except energy. About 15,000 energy jobs were lost in April, worst month since May 2009. Lower oil prices increased the pressure on the energy sector. Low energy prices has caused energy companies to lose profits. As a result, they had to cut jobs. Recently, crude oil inventories supply were declining, which caused oil prices to rise above $60.
Last Tuesday (May 5, 2015), trade balance report was released and it exploded. The US trade deficit widened by 43.1% to a seasonally adjusted $51.4 billion in March, largest monthly expansion in the trade gap since December 1996 and the largest deficit reading since October 2008. Trade balance is when you subtract imports from exports. In other words, it’s the difference between imports and exports.
A biggest reason for the weakness was the 9-month slowdown at West Coast port due to a labor contract dispute. West Coast ports is back in business. Imports arriving though the West Coast port surged. Imports increased 7.7% in March, the largest increase on record. While exports only increased 0.9% in March, reflecting strong dollar impact. In the past 12 months, the dollar has jumped almost 10%. Strong dollar had made Americans goods and services less competitive in global markets. Bigger imports and smaller exports mean a bigger deficit.
I believe it’s not to worry about in a long term. Once the backlog is cleared, imports will drop and the trade deficit will also drop.
Recently, the dollar has fallen sharply because of weak US economic reports, including Gross Domestic Product (GDP).
On April 29, 2015 (Wednesday), GDP Advance estimate increased at an annual rate of 0.2% in the first quarter of 2015, down from 2.2% in the fourth quarter of 2014 (-2.0%). This is a huge difference. Economists were anticipating growth of 1% in the first quarter.
Again, the weakness was due to U.S. dollar, low energy prices, West Coast port strike, and the bad weather. West Coast port strike disrupted the flow of trade, increasing imports which negatively impact GDP. In the past 12 months, the dollar has jumped almost 10%.
According to the report, Real exports of goods and services decreased 7.2% in the first quarter, from an increase of 4.5% in the fourth quarter. Real Imports of goods and services increased 1.8%, from an increase of 10.4% in the fourth quarter.
I’m afraid that Q1 GDP will be revised to negative number. Second estimate (Preliminary) of Q1 GDP will be released on Friday, May 29, 2015.
First quarter GDP was disappointing. I believe the economy should bounce back in the 3 quarters of 2015.
US markets were very happy with the jobs report, but not with other economic reports. The Dow soared more than 250 points, or 1.5% on Friday. While USD bracket currencies were mixed.
Check out the charts below; Dow Jones and US Dollar. US Dollar has fallen signification after hitting of $100.27 on mid-April. Dow Jones has been in a range. Dow Jones chart includes something “extra”, that’s not included in the post here.
If you have any questions, feel free to contact me anytime by going to “Contact Me” and/or leave comments below. Thank you.
Previous post about Microsoft: http://www.outofwacc.com/microsoft-earnings-game-changer-product-hololens/
On April 23, 2015 (Thursday), Microsoft (NASDAQ: MSFT) reported its Earnings Release FY15 Q3 that exceeded analyst’ estimates for both revenue and earnings. Microsoft reported revenue of $21.73 billion for the quarter, up 6.5% year-over-year. Net income fell to $4.99 billion, or 61 cents per share, from $5.66 billion, or 68 cents, a year earlier (10% decline year-over-year).
Microsoft’s restructuring plan announced in July 2014 (job cuts) and the ongoing integration of the Nokia Devices and Services business, which Microsoft acquired for $7.2 billion last year, had $190 million, or a $0.01 per share negative impact.
Satya Nadella, CEO of Microsoft, has been changing strategy to focus more on cloud and mobile software, since demand for PCs are decreasing as new technologies are replacing the PCs. Cloud revenue is growing. Overseas sales have been hurt by a strong dollar and geopolitical concerns in Russia and China.
The currency fluctuations, including a strong dollar had a significant impact on results. Excluding the effect of Forex market, revenue and gross margin would have grown 9% and 4%, respectively, and operating income and EPS would have declined 4% and 7%, respectively.
Cloud software sales increased, while demand for personal computer product decreased. Personal computer are dead-end. Commercial revenue grew 5% to $12.8 billion, led by commercial cloud which grew 106%. Cloud market is gaining traction and I believe Microsoft is doing the right thing by focusing more on the cloud market.
Microsoft 10 operating system is coming. Microsoft is offering free upgrades for some customers. Microsoft is hoping that their PC sales will increase after the launch of Windows 10.
Microsoft Build Developer Conference 2015
At Build Conference, Microsoft announced the Windows Holographic Platform for developers to develop apps for HoloLens. Developers would love to get their hands on HoloLens. Microsoft still hasn’t disclosed the price and when it will be released. I still believe HoloLens will be the next “Big Thing”.
Windows 10 could the first universal Operating System. We soon will find out.
Microsoft announced its replacement for Internet Explorer, Microsoft Edge. The question is “Will it be successful?”
Microsoft (NASDAQ: MSFT) Stock
Investors loved the earnings report. The stock rose more than 10%.
As stated in my previous post about MSFT ( http://www.outofwacc.com/microsoft-earnings-game-changer-product-hololens/ ), I said that the fall in the stock’s price was a good buying opportunity. If you took my suggestion, you now have more than 10% return. I still haven’t brought MSFT. I may have missed the opportunity. Though my experience in investing, I learned that you should not let your emotions effect your investment decisions. If you missed the opportunity, you missed one of many. There are many other opportunities. All you got to do is catch them.
I still may buy MSFT soon, even at its current price.
If you have any questions or comments, feel free to comment below and/or contact me by going to “Contact Me” page. Thank you.