Dollars and Sense: The Fed speaks, and the markets shrug

The Fed speaks. The big news this week came out of the Federal Open Market Committee (FOMC) meeting, held last week for two days, At the end of that meeting, as is the FOMC’s custom, the Fed Chair made a statement. Janet Yellen said a number of things that made news, but perhaps the most significant was a cut in the Fed’s projection for economic growth this year. She said the economy would grow at only about 2.1 to 2.3 percent. She also cut the amount of bond buying the Fed would do by another $10 billion per month, to $35 billion.

Markets say “meh.” The cut in growth was not good news, but the markets took it in stride, actually going up after Yellen made the announcement. Why would that be? I think it’s because that slowdown has already been “baked in” to the markets, as they say. It’s old news. Yellen’s announcement merely made it official. Traders already knew the first quarter was bad. They also know that the economy has perked up since then, and the economic news has mostly been good.

The rest of the news. So what is some of that good news? The job picture continues to improve. The number of new claims for unemployment remains around 300,000, and it fell by 6,000 last week, which is good. On Tuesday, the Commerce Department reported housing starts declined 6.5 percent in May. That report was worse than expected, but the long-term trend in housing starts continues to be in a positive direction.

Mergers continue. As we mentioned last week and the week before, merger and acquisition activity continues to be strong. This week came the announcement that Medtronic has agreed to purchase Dublin-based Covidien for $42.9 billion. That’s the biggest deal I saw this week, but there were others. And the Medtronic deal had an interesting geopolitical dimension that could serve as a wake-up call for Congress. Medtronic is the much larger company, and it’s U.S.-based, so you would think the headquarters of the merged company would stay here. But because U.S. corporate tax rates are so high, the combined company plans to move its headquarters to Ireland, where the tax rates are much lower.

Around the world. Speaking of geopolitical dimensions, the situation in Iraq continues to deteriorate. Is it affecting the corporate world? It’s a good question, because when unrest plagues parts of the world, we often see a retreat in the stock markets, a rise in gold, and often a rise in U.S. currency as investors retreat to safe havens. Interestingly, we didn’t see much of that last week. I should add, though, that individual companies did see some impact. Last Wednesday, Reuters reported ExxonMobil carried out a “major evacuation” of staff from Iraq, and BP evacuated 20 percent of its workers from the country. Whether the trouble spreads or not depends a great deal on what the United States does militarily, and we may not know what that will be for a while yet.

The week ahead. Things are winding down toward July 4. We won’t get a lot of economic reports this week, and volume has been trending slightly downward in the markets. The situation in Iraq or elsewhere could still roil the markets, but in general I think traders are coasting toward the holiday.