Market Update: February 21, 2017

© Susan Walsh/AP Photo


  • Stock advance continues following record-setting week. U.S. stocks are moving higher in early trading as markets reopen following the Presidents’ Day holiday. All three major averages ended the prior week at record highs; the S&P 500 (+0.2%) advanced modestly as telecom (+0.9%) was the best performing sector. Equities in Asia closed mostly higher overnight amid a quiet session, though the Hang Seng lost 0.8%. European markets are seeing broad strength in afternoon trading (STOXX Europe 600 +0.5%) as investors sift through PMI data that came in mostly above expectations; the U.K.’s FTSE is the exception (-0.1%) as disappointing earnings in the banking sector drag it lower. Finally, Treasuries are losing ground as the yield on the 10-year note is up to 2.44%, WTI crude oil ($54.78/barrel) is up 1.9%, and COMEX gold ($1234/oz.) is slipping 0.4%.


  • Treasury prices initially lower, then rebound late week. Last week began with Chinese consumer price index (CPI) and producer price index (PPI) data rising much more than analyst estimates, setting the tone for more inflationary pressure on U.S. Treasuries. On Tuesday, Federal Reserve Chair Yellen, in her semi-annual testimony before Congress, stated that it would be “unwise to wait too long to hike interest rates.” This moved the yield on the U.S. 10-year Treasury higher by 8 basis points (0.08%) to 2.52%, as investors began to price in a March rate hike. Thursday’s session saw a slight rebound in prices following a move lower in European yields as the Greek bond market stabilized. This week, investors will be watching the economic calendar for more evidence of inflation.
  • Inflation expectations edge up. The 10-year breakeven inflation rate finished last week slightly higher, moving from 2.01% to 2.02%. Importantly, the breakeven rate is above the Fed’s 2% inflation target. This week, we take a deeper look at Treasury Inflation-Protected Securities (TIPS) and why, despite solid performance relative to Treasuries in the second half of 2016, there may be further opportunity within the asset class for investors seeking credit and inflation protection.
  • Municipals supply lower on the week. Muni supply, as measured by the Bond Buyer 30-day visible supply data, remains below the 10-year average of approximately $11 billion, coming in at $7.5 billion last week. Supply is expected to remain light due to the holiday-shortened week. However, March and April supply is expected to grow as the Bloomberg fixed rate calendar supply data already shows an increase in supply from $6 billion on Thursday, February 16 to $7.6 billion today.
  • Investment-grade corporates spread breaches 1.2% level. As measured by the Bloomberg Barclays US Corporate Index, this level had provided resistance since late January. As equities made a decisive move higher over the last two weeks, investment-grade corporates have followed suit. Equity strength, investors’ demand for high-quality yield (above that of Treasuries), and increased prospects for corporate tax reform were all contributed to the spread contraction.
  • Earnings dipped last week but estimates still holding firm. Q4 2016 earnings for the S&P 500 are now tracking to a 7.5% year-over-year increase (as measured by Thomson), down about 1% over the past week on insurance industry declines. Financials and technology are still on course for solid double-digit earnings gains. While a 7.5% growth rate is certainly nothing to sneeze at, the better news may be that consensus 2017 estimates are down only 1.1% since earnings season began (and still up over 10% versus 2016), buoyed by flat or positive revisions to financials, energy and industrials estimates. Interestingly, these sectors are particularly policy sensitive, suggesting policy hopes are seeping into analyst and management team outlooks.


  • Leading indicators rise. The Conference Board’s Leading Economic Index (LEI), an aggregate of indicators that tends to lead overall economic activity, rose a strong 0.6% month over month in January, beating the expected 0.4% increase and better than December’s also-strong 0.5% gain. The LEI is now up 2.5% year over year, a rate of change that historically has been accompanied by low risk of recession in the next year.
  • Domestic oil markets in focus. The addition to U.S. supply from shale deposits over the past decade is well known, but demand has changed as well, influenced heavily by our choice of vehicles as well as fuel efficiency standards. President Trump has signed a number of executive orders related to energy, most notably on the Keystone XL Pipeline. However, the administration has not weighed in on other issues, such as fuel economy standards. Any policy changes, as well as how they are enacted, could influence both U.S. supply and demand considerations.
  • European economic growth accelerates. A series of PMI data was released in Europe overnight, pointing to growth increasing at a faster rate than expected. Data from the two largest countries, France and Germany, were better than expected. The Eurozone composite reading (including services and manufacturing) registered 56, the highest reading in 70 months. Inflation in France remained contained at 1.3%, though many in Europe believe that the stronger economy will lead to higher inflation data in the near future.
  • More new highs. Equities staged a late-day rally on Friday to close at new record highs. In fact, the S&P 500 closed at its ninth record high for 2017. This is halfway to the 18 from 2016 and nearly to the 10 record highs made during 2015. Although no one knows how many more new highs will be made this year, it is important to note that they tend to happen in clusters potentially lasting decades. Going back to the Great Depression[1], there have been two long clusters of new highs – from 1954 to 1968 and from 1980 to 2000. The years in between were marked by secular bear markets and a lack of new highs. Could the current streak of new highs that started in 2013 last for many more years?
  • Four in a row. The S&P 500 gained 1.5% last week, closing higher for the fourth consecutive week for the first time since July 2016. The last time it made it to five weeks in a row was coming off of the February 2016 lows. Of the last 12 times the S&P 500 has been up four consecutive weeks, 10 of those times it has closed even higher two weeks later, so momentum can continue in the near term. The S&P 500 has been up only 3.5% in the current streak – the weakest four-week win streak in nearly five years. Going back to 1990, when the S&P 500 is up four weeks in a row, but with a total gain less than 4%, the average return the following two weeks is twice as strong (1.0% versus 0.5%) as the average return after all four-week win streaks.



  • Markit Mfg. PMI (Feb)
  • Harker (Hawk)
  • Kashkari (Dove)
  • Eurozone: Markit PMI (Feb)
  • China: Property Prices (Jan)


  • Existing Home Sales (Jan)
  • FOMC Minutes
  • Germany: Ifo (Feb)
  • OPEC Technical Meeting in Vienna
  • Brazil: Central Bank Meeting (Rate Cut Expected)


  • New Home Sales (Jan)








[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Update: Monday, October 3, 2016

LPL Financial Research


  • Global markets assess oil rally and Brexit update. U.S. stocks are lower this morning after closing the third quarter on a positive note. The financial and energy sectors led Friday’s rally, boosted by reports that Deutsche Bank may have reached a settlement to reduce the $14 billion fine levied by the U.S. Department of Justice and that OPEC may be on track to reduce output; WTI crude oil sits at $48.20/barrel. The British pound is falling against other currencies after U.K. Prime Minister Theresa May promised a swift exit from the European Union; U.K. stocks are markedly higher though the rest of Europe is near flat in afternoon trade. Overnight, the Nikkei Index gained 0.9% while Hong Kong’s Hang Seng rose 1.2% on mixed Purchasing Managers’ Index (PMI) data; the Shanghai Composite is closed all week for a holiday. Meanwhile, COMEX gold ($1316/oz.) is modestly lower and weakness in Treasuries

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Fourth Quarter, a Look Back…

ECB Announces Monthly Rate Decision
Photographer: Hannelore Foerster/Bloomberg

The Federal Reserve pulled the trigger. At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s important to remember the Fed doesn’t actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.

The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies. Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.

China’s currency gained status. The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.

Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016’s presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.

Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.

Weekly Advisor Analysis: December 7, 2015

Equity markets finished a roller coaster week essentially flat. By midweek the markets were up nearly 70 basis points before collapsing 3 percent on disappointments from the European Central Bank who decided not to expand bond purchases. This also caused a plunge in the U.S. dollar as investors who were short the Euro in anticipation of this move. Then, Friday saved the week when the encouraging November jobs report pushed markets 2 percent higher and investors viewed this as confirmation a rate hike by the Federal Reserve next week is now a certainty. When all was said and done, the S&P 500 ended the week up just 0.1 percent, with the Dow Jones Industrial Average and NASDAQ Composite both gained 0.3 percent.

The Nail in the Coffin

The November jobs report from last Friday should put to rest the debate over whether or not the Federal Reserve is going to raise rates after its Open Market Committee meeting December 15-16. During the month of November, U.S. employers added 211,000 jobs which was above consensus expectations. Additionally, the two prior months were revised higher by 35,000 jobs. The unemployment rate remained at 5 percent and, importantly, wage expansion remained above 2 percent year-over-year growth. Another promising data point out of the release was the continued rise of the quit rate, or measure of those who voluntarily quit their jobs. This reached 10 percent, the highest level in four months. All of the boxes appear to be checked for Chair Yellen to begin hiking rates next week. And, while it seems like a foregone conclusion, we think investors should be mindful the Fed has moved the goalposts before and, just last week, almost every financial prognosticator was proven wrong when the European Central Bank did not expand its bond buying program.

Emerging Market Defaults on the Rise

According to Standard & Poor’s, corporate defaults in emerging markets are up 40 percent year-over-year and have hit their highest level since 2009. The default rate over the past 12 months is close to 4 percent compared to just 0.7 percent four years ago. The 4 percent also outpaces default rates for U.S. companies, which hovers around 2.5 percent. The increasing pace of defaults should be no surprise. The amount of emerging market corporate debt has quintupled over the past 10 years to nearly $24 trillion as investors have stretched for yield in a low rate world and companies were eager to borrow as their commodity-driven economies expanded. However, this has come to an abrupt end and the worst may be yet to come. According to the Institute of International Finance, more than $600 billion of debt matures in 2016. Even worse, some $85 billion of this is denominated in dollars. A rate hike by the Federal Reserve could continue pushing the dollar higher, making it more expensive to repay debt when slowing economic growth is crimping profit.

Provided by The Wall Street Journal

Renminbi Becomes a Reserve Currency

Early last week, the International Monetary Fund (IMF) added the Chinese renminbi to its basket of reserve currencies. It joins the U.S. dollar, the Euro, the British pound, and the Japanese yen in the basket known as Special Drawing Rights. The Managing Director of the IMF stated the renminbi’s inclusion is an important step but more financial reform is needed. Shortly after the decision, a deputy governor from the People’s Bank of China said the country would maintain a managed-floating system before gradually moving a free-floating currency. This allayed fears that China would move immediately to devalue the renminbi. The addition of China’s currency to the reserve basket is a testament to that country’s growth over the past decade. It now accounts for more than 15 percent of global economic output, up from just 5 percent nearly a decade ago.

Provided by The Wall Street Journal

Fun Story of the Week

A classic schoolyard insult is to bellow, “You’re slower than my grandma!” For Elvira Montes’ three grandkids, this is probably true. The 81-year old recently became the oldest finisher of the 2015 Beer Mile World Championship. The beer mile requires runners to chug a 12-ounce beer before each of the four quarter-mile laps around a track. She finished in just over 20 minutes, even beating her 47-year old daughter by 50 seconds. Mrs. Montes began running more than two decades ago, and this was her second beer mile. She plans to return to the world championships next year; her goal is to break 20 minutes.

Weekly Advisor Analysis: October 12, 2015

The “risk on” trade emerged in full force last week after investors dissected the release of the minutes of the Federal Open Market Committee. The S&P 500 rose 3.3 percent. The Dow Jones Industrial Average jumped 3.7 percent. The NASDAQ Composite climbed 2.6 percent. Equities were not the only asset class moving higher last week; the price of oil soared 9 percent.

IMF Lowers Forecast Again

The International Monetary Fund (IMF) hosted its annual meeting of central bankers and finance ministers in Peru last week, and the organization lowered its outlook for global growth for 2015 to 3.1 percent compared to the prior estimate of 3.3 percent. The slowdown in emerging markets has prompted the organization to cut its outlook there to 4 percent. This is the fifth consecutive year of slowing growth. The IMF stated there is a 50 percent chance global growth will continue decelerating in 2016 and fall below 3 percent, which is the equivalent of a global recession.

No Concerns of Deflation Here

As the rest of the world grapples with potential deflation there is one area of the domestic economy where there is no confusion around continually higher prices: childcare. According to the Economic Policy Institute, the price of childcare exceeds rent for families with two children in 500 of the 618 local areas where the group collected data. According to the Bureau of Labor Statistics, childcare costs have ballooned 168 percent since 1990, more than twice the rate of total consumer prices. Shockingly, childcare costs have outpaced another family budget line item that has notoriously risen over the years: college tuition. In 33 states, infant care costs more than the average in-state college tuition for a public institution. And there is no relief in sight: millennials are now entering their prime child-bearing years and the supply of daycare centers has not kept pace, pushing demand ever higher.

Holiday Shopping Expected to Grow Slower

Those higher daycare costs may be denting holiday sales. Last week, the National Retail Federation predicted a 3.7 percent rise in sales for the upcoming holiday seasons. Several other forecasting services are calling for sales expansion in the same ballpark. This compares to a 4.1 percent gain last year. However, despite the slight slowdown from last year, the expected rate is still higher than the average for the last decade, which measures 2.5 percent. The trend toward more online purchases is expected to continue. The National Retail Federation anticipated growth in this segment to range between 6-8 percent.

Fun Story of the Week

Thanksgiving is still weeks away, but it’s never too early to start thinking about your strategy for maximizing dessert consumption. This year’s tip is to head for the pumpkin pie first; it might not last. Severe rains in the Midwest have put a big dent in pumpkin harvests. Yields in Illinois, America’s great pumpkin patch, are down 50 percent year-over-year according to Libby’s, the largest U.S. producer of canned pumpkin. Libby’s has an 80 percent market share in the United States, and the Nestle brand said it will make enough cans of filling to bake 45 million eight-inch pies, but this is half of what it originally planned.

Recession Buzz is Heating Up on Wall Street

Provided by CNBC

Wall Street is getting increasingly nervous about the prospects for recession, both on a global and domestic level.

Slowing global growth has been one of the predominant investing themes in 2015, causing enough turmoil to send both the S&P 500  (.SPX) and the MSCI World Index  (.WORLD) down about 4 percent.

The $73.5 trillion global economy is expected to grow 3.1 percent in 2015 and 3.6 percent in 2016, according to the latest International Monetary Fund projections. Those numbers, though, are heading lower and could be revised even more before all is said and done.

Citigroup economist Willem Buiter looks at the world landscape and sees an economy performing substantially below potential output, which he uses as the general benchmark for the idea of a global recession. With that in mind, he said the chances of a global recession in 2016 are growing.

“We think that the evidence suggests that the global output gap is negative and that the global economy is currently growing at a rate below global potential growth. The (negative) output gap is therefore widening,” Buiter said in a note to clients. He added, “from an output gap that was probably quite close to zero fairly recently, continued sub-par global growth is likely to put the global economy back into recession, if indeed the world ever fully emerged of the recession caused by the global financial crisis.”

Recessions aren’t necessarily a bad things for investors.

In the 12 recessions after World War II, the S&P 500 has gone up six times afterwards and down the other six times. The average has been a decline of 3.1 percent, followed by a 12.9 percent increase six months out and 15.3 percent gain a year after, according to figures from Sam Stovall, U.S. equity strategist at S&P Capital IQ.

Economists look at global recessions a bit different than national ones. Though there is no strict definition of the word, a country is generally thought to be in “recession” if it registers consecutive quarters of negative growth.

On a global scale, though, the standard is different. Absolute growth less than 3 percent, or GDP adjusted for market exchange rates below 2 percent, is generally good enough to call a recession. By either measure, the world is teetering on the line, with 2015 adjusted growth pegged at 2.5 percent and 2016 at 3 percent.

Closer to home, the prospects for recession seem low, though worries have increased in recent days.

Liz Ann Sonders, the often-bullish chief investment strategist at Charles Schwab, generated some talk on Wall Street this week when she announced that the firm, which manages $2.46 trillion for clients, has turned neutral on stocks.

Her worries are twofold, and both involve recessions: One, the much-discussed potential for an earnings recession, the other a “relatively low” chance for an outright economic recession that she nonetheless believes should be considered.

Corporate earnings on the S&P 500 are expected to decline just over 5 percent in the third quarter, according to estimates from both FactSet and S&P Capital IQ—Estimize puts the decline closer to 2.2 percent—and projections for the fourth quarter are coming down at a steady clip as well. Where at one point the final three-month period was expected to show 12 percent earnings growth, the estimate now is for a nearly 1 percent drop. Full-year earnings growth is now projected to be -0.75 percent, according to S&P Capital IQ.

On balance, Sonders believes employment and income growth are “still relatively healthy” despite the dismal September nonfarm payrolls report showing just 142,000 new jobs for the month and flat salaries. She also points to strength in housing, car sales and construction spending.

However, weakness in earnings and profit margins, widening credit spreads and slowing global trade remain significant headwinds, she said.

“We believe an economic recession remains unlikely near-term, but we are on watch,” Sonders said in a note. “We are maintaining our more cautious ‘neutral’ rating on US equities, which means investors should not take any additional risk above and beyond their long-term allocation to equities.”

Written by Jeff Cox of CNBC

(Source: CNBC)

Policy Makers Skeptical on Preventing Financial Crisis

Pat Greenhouse/The Boston Globe, via Getty Images
Pat Greenhouse/The Boston Globe, via Getty Images

BOSTON — The 2008 financial crisis convinced most people in the world of central banking that it would be a good idea to try to prevent that kind of thing from happening again.

But policy makers have made little progress in figuring out how they might actually do so, a troubling reality highlighted at a conference that ended over the weekend at the Federal Reserve Bank of Boston.

The Fed has publicly committed itself to a strategy of so-called macroprudential regulation, meaning it is now focused on maintaining the stability of the financial system as well as the health of individual firms. But senior Fed officials at the Boston conference described that as more of a goal than an achievement.

Crises remain hard to anticipate and prevent, and the available tools could cause significant economic damage.

“My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States,” William C. Dudley, president of the Federal Reserve Bank of New York, told the conference.

In the meantime, the importance of prevention has only increased because the Fed’s ability to respond to the outbreak of a crisis has diminished. The 2010 Dodd-Frank Act prevents the Fed from repeating some aspects of its 2008 actions. More important, the Fed expects interest rates to remain below historic norms for the foreseeable future, leaving less room to cut rates, which has long been its first line of defense.

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Donald Kohn, a former Fed vice chairman, said he was troubled by the gap between perception and reality. “If you ask people who is responsible for financial stability they would say, ‘The Fed,’ ” said Mr. Kohn, a senior fellow in economic studies at the Brookings Institution. “But the Fed doesn’t really have the instruments. It doesn’t really have the tools.

“And I think this is a dangerous situation if people perceive that it has the responsibility and it doesn’t have the tools.”

The obvious reason to prevent bubbles is that crises are bad for the economy. Seven years after the peak of the 2008 crisis, the Fed still has not been able to drive unemployment or inflation back to normal levels. The unemployment rate has fallen to 5.1 percent — a level usually associated in the past with a robust economy — but that figure overstates the current health of the labor market.

Prices, meanwhile, rose just 0.3 percent in the 12-month period ending in August, far below the 2 percent level the Fed would like to achieve to support healthy spending and investment.

The basic problem for regulators is that crises are hard to predict. A 2012 study by the International Monetary Fund concluded that only about one-third of credit booms ended in crashes. Many instead produced permanent economic benefits. And even in retrospect, the researchers found it hard to identify clear warning signs.

So popping bubbles probably means curtailing some beneficial booms, too.

“We’ll have to make a choice about how much growth we are willing to give up in good times to limit the likelihood of a future financial crisis,” said Loretta J. Mester, president of the Federal Reserve Bank of Cleveland.

Other officials and experts also share Mr. Dudley’s doubts about the Fed’s power to pop bubbles. American regulators have fewer tools than some of their European counterparts, and those tools are distributed among a number of agencies that have little history of cooperating either quickly or effectively.

“The current U.S. institutional setup is likely to fail in a crisis and will do less to prevent a crisis than it should,” said Adam S. Posen, president of the Peterson Institute for International Economics. “And we are likely to suffer from this.”

Frederic S. Mishkin, a former Fed governor, noted that financial firms tend to resist increased regulation, often with considerable success. “They’re going to hire a lot of lawyers to figure out how to get around these regulations and undermine them,” Mr. Mishkin, a Columbia University economist, said.

These constraints on the Fed’s ability to recognize and respond to problems as they are developing has led officials to emphasize measures that strengthen the resilience of the financial system. A prominent example: stricter limits on banks’ reliance on borrowed money. Mr. Dudley said progress in this area should provide “considerable solace” to those worried about the slow progress of macroprudential regulation.

Some officials, however, argue that a more drastic shift may be necessary. They want the Fed to use its most powerful tool — raising and lowering interest rates — to help maintain the stability of financial markets.

The Fed might curb speculative excesses by raising interest rates. Similarly, it could soothe fragile financial markets by holding rates steady, as it is doing now, or by cutting rates, as it does during downturns.

Janet L. Yellen, the Fed’s chairwoman, has generally resisted this suggestion, arguing in a 2014 speech that monetary policy should remain focused on moderating inflation and minimizing unemployment. Raising interest rates across the economy to limit speculation in a particular area is the rough equivalent of weeding a garden with a bulldozer. Ms. Yellen has suggested she would consider it only as a last resort.

But Ms. Yellen’s deputy, the Fed vice chairman Stanley Fischer, said on Friday at the Boston conference that the use of monetary policy for such goals deserves consideration. “There may be times when adjustments to monetary policy should be discussed as a means to curb risks to financial stability,” he said.

Jeremy C. Stein, a former Fed governor, has argued that the broader effects of raising interest rates actually numbers among its virtues, because it potentially enables the Fed to discourage risky speculation it has not even managed to identify.

Eric S. Rosengren, the Boston Fed president, argued in a paper that opened the conference that financial stability should join inflation and employment as explicit objectives of monetary policy. Moreover, Mr. Rosengren and his co-authors presented evidence that the Fed already treats financial stability as a goal. They showed that the movement of the Fed’s benchmark rate tracks discussions of financial stability at Fed policy-making sessions.

Others, however, said it was not clear that raising rates was a more effective means of addressing risks to the financial system than sensible regulation.

“I’m a skeptic,” Mr. Kohn, of Brookings, said. “I think that monetary policy, changes in interest rates, are likely to be not very effective in damping a lot of these cycles.”

The current discussion is largely framed by the details of the last crisis. Mark Gertler, a professor of economics at New York University, said he saw little reason to think the Fed could have curbed the rise of housing prices in the years leading up to the 2008 crisis by raising interest rates more quickly. He noted that Britain had higher rates than the United States and just as severe a housing bubble.

Instead, Mr. Gertler said, “We can certainly imagine that some kind of restrictions on the subprime market might have been a more effective way to contain this mess.”

Nellie Liang, director of the Fed’s office of Financial Stability Policy and Research, presented a study showing that changes in interest rates have a limited effect on credit booms in the early stages, and then even that fades away. That suggested that macroprudential measures had a role to play.

But the skeptics held sway.

Luc Laeven, director general for research at the European Central Bank, provided a fitting, if disheartening, summary of the conference.

“Both monetary policy and macroprudential policy are not really very effective,” Mr. Laeven said.

He added a plaintive question. “Do we have other policies?”

Written by Binyamin Appelbaum of The New York Times

(Source: The New York Times)

Dow Tries to Hold Gains; Nasdaq Falls 1% as Biotechs Plunge Over 6%

© Provided by CNBC
© Provided by CNBC

U.S. stocks traded in a narrow range Tuesday, attempting to extend a sharp two-day rally, as investors awaited the official beginning of third-quarter earnings season.

The Nasdaq composite was the biggest decliner, falling over 1 percent in late-morning trading as the iShares Nasdaq Biotechnology ETF (IBB) fell more than 6 percent.

“We saw this dynamic yesterday,” said Art Hogan, chief market strategist at Wunderlich Securities. “If you look at the IBB, it hit support at $291 and saw resistance at $314.”

The Dow Jones industrial average attempted to hold slight gains after a mildly lower open, with UnitedHealth weighing the most on the index. DuPont rose more than 10 percent to contribute the most to to gains.

Materials and energy advanced more than 1 percent as the greatest advancers on the S&P 500, which briefly attempted slight gains.

After the close Monday, the chemical company’s chairman and Chief Executive Officer Ellen Kullman announced plans to retire October 16. Director Edward Breen will serve as interim chairman and CEO. DuPont also cut its outlook for the year and announced an acceleration of its plans to trim expenses.

“Obviously after two strong days of back-to-back gains a little profit taking is the order of the day,” said Peter Cardillo, chief market economist at Rockwell Global Capital. “Any further strengthening in oil could propel stocks higher.”

Crude oil gained over 3 percent to hold above $48 a barrel, while Brent topped $51 a barrel.

“It will be a combination of preparing for earnings and what we’ll see for the next few quarters,” said Peter Boockvar, chief market analyst at The Lindsey Group.

He doesn’t think the bottom has been put into the stock market yet. “Even with the rally of substance we’re still below the major moving averages. The global growth story is weaker,” Boockvar said.

The International Monetary Fund trimmed its global growth forecast for 2015 from 3.3 percent to 3.1 percent, citing weaker growth prospects for emerging economies.

The S&P, Nasdaq and Russell 2000 are trading below their 50-day moving averages. The Dow held above its 50-day moving average but has not closed above it since July 20.

The Dow transports closed above their 50-day moving average of 8.053.46 Monday for the first time since Sept. 17 but traded below that level Tuesday morning.

Before the opening bell, PepsiCo reporting earnings that beat on both the top and bottom line. The firm also raised its full-year growth target. Shares of Pepsi gained more than 1.5 percent in morning trade.

Yum Brands is scheduled to report after the close. The unofficial start to earnings season comes Thursday with Alcoa’s earnings after the bell. The bulk of third-quarter earnings reports come in the next few weeks.

Nick Raich, CEO of The Earnings Scout, said that of the 20 S&P 500 companies that have reported so far, 85 percent have beat on earnings and 60 percent have beat on revenue.

“It’s only 20 companies but it’s an encouraging start to earnings season,” he said. It’s “a lot of consumer companies. We have yet to see a financial company or an earnings company report. … Those are going to drag down the overall earnings.”

Financials will likely see some pressure from the low interest rate environment, Raich said, while energy companies continue to face headwinds from low oil prices.

On the data front, the August trade deficit came in at $48.3 billion, the widest in five months.

Treasury yields spiked before holding lower, with the 10-year at 2.04 percent and the 2-year at 0.60 percent in late-morning trade.

The dollar held lower, with the euro at $1.12 and the yen at 120.18 yen against the greenback.

U.S. stocks closed more than 1.5 percent higher Monday, extending Friday’s surprise intraday reversal, as investors digested the implications of the jobs data on the timing of a rate hike and awaited quarterly earnings.

While some analysts said the gains were a technical bounce from correction levels, others said the weaker-than-expected jobs report led to expectations of lower rates for longer. After the monthly nonfarm payrolls report, Fed funds futures were pricing in expectations that the first rate hike will come no earlier than March 2016.

All three major averages closed Monday within 10 percent of their 52-week highs, or out of correction territory. The Russell 2000 remained in correction mode.

“There’s a good possibility as the first few earnings begin to creep in we could approach 2,000 (on the S&P 500) and cross above that,” Cardillo said.

In Europe, stocks traded slightly higher on Tuesday following Monday’s rebound, after poor industrial data out of Germany.

In Asia, the Nikkei closed 1 percent higher as investors digested news of agreement on the historic Trans-Pacific Partnership and awaited the outcome of the Bank of Japan’s policy meeting Wednesday. The Trans-Pacific Partnership trade deal among the United States, Japan and 10 other Pacific Rim countries still needs approval from the U.S. Congress.

In mid-morning trade, the Dow Jones Industrial Average fell 20 points, or 0.12 percent, at 16,756, with UnitedHealth leading deliners and DuPont leading advancers.

The S&P 500 traded down 11 points, or 0.6 percent, at 1,975, with health care leading seven sectors lower and energy leading advancers.

The Nasdaq traded down 59 points, or 1.24 percent, at 4,721.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 19.93.

Decliners and advancers were about even on the New York Stock Exchange, with an exchange volume of 373 million and a composite volume of 1.722 billion in early afternoon trade.

Crude oil futures for November delivery gained $1.91 to $48.16 a barrel on the New York Mercantile Exchange. Gold futures rose $12.70 to $1,150.30 an ounce as of 11:09 a.m.

Written by Evelyn Cheng of CNBC

(Source: CNBC)

Weekly Market Commentary: October 5, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Well, third quarter was a humdinger.

It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally.

After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.

No Grexit – for now

Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads.

The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.

A downturn in China

Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter:

“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”

That statistical sleight of hand implies China experienced deflation early in the year. It did not.

On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.

Red light, green light at the Federal Reserve

Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy. According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength.

They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.

Global trade in the doldrums

The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.

Data as of 10/2/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.0% -5.2% 0.3% 10.5% 11.4% 4.8%
Dow Jones Global ex-U.S. 0.7 -8.6 -10.3 0.8 0.0 0.9
10-year Treasury Note (Yield Only) 2.0 NA 2.4 1.6 2.5 4.4
Gold (per ounce) -0.5 -4.9 -5.9 -13.7 -2.8 9.4
Bloomberg Commodity Index -0.7 -15.8 -25.7 -16.1 -8.7 -6.9
DJ Equity All REIT Total Return Index 1.5 -3.3 9.2 9.4 11.6 6.8

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s,, London Bullion Market Association.

Yellen Faces Historic Choice: Pain Now or Panic Later


We are now just hours away from the most important Federal Reserve policy decision in a generation — one that could result in the first interest rate hike in nine years and begin unwinding the greatest experiment in cheap money policy in human history. There is no easy choice for Fed Chair Janet Yellen in the most pivotal moment of her career.

It’s not hyperbole: This bull market has been sustained by the Fed’s stimulus while an emerging market credit binge has been financed with cheap dollars. Stocks moved higher on Monday and Tuesday as optimism builds the Fed will once again give the market what it wants and wait, possibly until 2016, before ending its near-zero percent interest rate policy that’s been in place since 2008. Futures market odds put a rate hike now at less than 30 percent.

“No hike” hopes have been bolstered by a batch of disappointing economic data this week on retail sales, industrial production and consumer price inflation. That’s lifted equities, bounced precious metals and pushed up bond-market inflation expectations in a way not seen since April.

And yet there is a nagging fear the Fed could deliver a hawkish surprise given cumulative progress on job gains and economic growth.

A survey of 135 institutional investors by Alberto Gallo, the head of macro credit research at Royal Bank of Scotland, revealed the depth of the cognitive dissonance in play.

A majority believes the Fed should hike now, with 63 percent saying central bankers are losing credibility with their repeated kowtowing to markets. Gallo adds that it’s becoming increasingly clear that extreme monetary policy is becoming less effective the longer it goes on, while, worryingly, making an eventual exit increasingly difficult. Eighty percent of those surveyed believe the Fed should hike by the end of the year.

Yet according to Gallo, only 42 percent of respondents believe the Fed willhike now. The International Monetary Fund, Chinese policymakers, Goldman Sachs and Larry Summers are among those warning the Fed that a hike now would be premature. Central banks that have attempted to raise interest rates since the financial crisis, such as those in Israel and Chile, have all had to backtrack and cut rates to various degrees.

Yet others, such as the Bank for International Settlements and the Organization for Economic Co-operation and Development, say that now’s the time to pull the monetary punchbowl away. Deutsche Bank shows how monetary policy remains in emergency mode despite the Fed nearing its mandate targets on inflation and employment.

Remember, all of this is the result of efforts to end the financial crisis that resulted from the bursting of the housing bubble and the mortgage-backed securities that funded it — a speculative fever caused by the Fed keeping interest rates too low during the mid-2000s. The Fed’s juicing of stock and bond prices was justified by the positive “wealth effect” that resulted. In 2010, after unleashing the $600 billion “QE2” bond purchase program, former Fed Chair Ben Bernanke wrote in The Washington Post that the action was done in part to lift stock prices to “boost consumer wealth and help increase confidence, which can also spur spending.”

But there are risks to the easy money policy that’s been in place for so long. As Gallo notes, “investors are concerned with structural imbalances building up further if ultra-loose monetary policy continues.”

Specifically, the realists on Wall Street are focused on the very scary rise in dollar-denominated debt in the emerging market economies. Also, the growing magnitude of each successive credit boom and bust cycle as the Fed has gotten more and more aggressive over the past decades is a concern. As is the low-volatility fragility in many areas of the bond market caused by regulatory changes, central bank purchases and investor herding. “If the Fed’s mandate is to worry about the medium-term and to target structural issues, the right thing to do would be to hike,” Gallo says. “This is also what the majority of institutional investors think.”

The IMF recently warned that correlations among major asset classes and between fund positions have risen in a big way since the financial crisis — setting the stage for more seismic shake-ups once the Fed finally hikes, as everyone rushes for the exit amid low liquidity and diminished diversification protection.

Yet the most likely response, as revealed in the survey data, in futures pricing and in market action this week, is another policy punt. Morgan Stanley’s Guneet Dhingra notes that in the 1999 and 2004 rate hike cycles, the Fed only moved when the market was fully prepared. In the 2004 campaign, no hikes occurred unless futures odds were 79 percent or higher the day before the decision.

Our central bank simply isn’t in the business of delivering hawkish surprises to the stock market. And institutional investors know this. Yet this only raises the stakes for the next “will they or won’t they” rate decision in October.

Written by Anthony Mirhaydari of Fiscal Times

(Source: Fiscal Times)