Fed shouldn’t normalize rates before the economy is back to normal
We shouldn’t overreact to short-term signals, but a good month of jobs data and a Federal Open Market Committee statement with the subtlety of a sledgehammer suggest that even though economic data say that a rate hike is inconsistent with the Fed’s long-term positions, an increase is nevertheless looking pretty likely next month.
What comes next is going to be interesting. Should we assume the Fed is committing to a normal series of rate increases we would expect following a recession?
Complicating any analysis of the Fed’s medium-term goals is a dearth of inflation.
Just this week we saw more research from Fed economists making the point that if you look really hard for inflation, you still don’t see any signs it’s on the way. It’s true that predicting inflation is hard, even for markets, but an interest-rate hike at this point — where nobody sees inflation on the horizon — makes it very hard to identify the Fed’s planned path over the next year. It all depends on what the Fed thinks about the real economy, and whether that matters.
Earlier this year, advocates of a rate hike made the case that getting above zero was a priority. So much so that a little hike and a long pause was put forward as sensible policy. That may yet be the plan — and the fundamentals of the real economy suggest it is the most appropriate plan that involves a rate hike. Of course this plan has major downsides — if you take the risk of recession seriously, we’re talking about setting up speed bumps in the Fed’s ability to respond to a negative shock.
Another possibility is the Fed is planning a more normal path of rate increases. Some market-based forecasts now show a significant chance that rates will be above 1% by this time next year. While that view is even more at odds with the real economy we expect in 2016 right now, it is perhaps more consistent with a central bank that is hoping to get back to normal interest rates sooner than macroeconomic conditions warrant.
By Michael Madowitz
In other words, some forecasters think we could see normalization of monetary policy before we see normalization in the real economy. That’s weirder than it sounds, because getting rates back to normal sooner means getting the real economy back to healthy, stable inflation levels slower.
Of course normalization is in the eye of the beholder. It’s clear that equilibrium real rates are lower today than they were before the recession, and if China’s slowing growth is a real thing, this will certainly be true a year from now. The way you normalize policy under these conditions is to get inflation up to normal levels quickly, an idea that doesn’t square with the Fed signaling a December rate increase with all the subtlety of a romance novel.
So what is the Fed’s plan? It’s really hard to say. In this sense, a rate hike in December may be a pyrrhic victory for Fed credibility. It will make all the statements about a rate hike before the end of 2015 true, but it makes it really hard to put stock in any claims about monetary policy in 2016. The Fed can only ignore the real economy so long.
By Michael Madowitz
Central banks have spent much of the recovery trying to get ahead of inflation, and in a sense they have succeeded, just too soon and too strongly. The Fed remains a holdout on raising rates, but as we get closer to what looks like a December rate hike, it’s worth noting that you can’t will a rate increase to stick.
Whatever happens over the next month, let’s hope the FOMC can settle on some concrete measures of progress in the real economy to anchor expectations going forward.
Short-term market volatility is not a good thing, but overly hawkish policy that locks in the labor force losses of the Great Recession is a much bigger problem in the long term. If you don’t like super-low interest rates, focusing on the real economy is the way to prevent them in the future.
That massive big-bank cyberfraud, in jaw-dropping numbers
100 million people hacked, 30 fake passports and more
The eye-popping numbers in the J.P. Morgan hacking case’s indictment reveal the scope of the alleged wrongdoing.
By Victor Reklaitis
It’s been called one of the biggest cybercrimes in history, involving the theft of data from millions upon millions of people, and requiring a massive worldwide ring of accomplices.
Federal prosecutors say a “diversified criminal conglomerate” of fraudsters hacked into companies, including banks such as J.P. Morgan, to steal customers’ personal details that they then used to carry out pump-and-dump stock schemes. The data theft also made it possible for the criminals to run illegal Internet casinos and even an unlicensed bitcoin exchange.
The range of hacking was “breathtaking,” Manhattan U.S. Attorney Preet Bharara said Tuesday.
Three men have been charged in the case. Take a look at these eye-popping numbers from the indictment to get a glimpse at the scope of the cybercrime empire:
By Victor Reklaitis
100 million people had their sensitive information stolen.
12 companies, including J.P. Morgan Chase & Co. , online brokerages like E*Trade Financial Corp. were allegedly hacked. Also on the list is News Corp.’s Dow Jones unit, which publishes MarketWatch and The Wall Street Journal.
$100 million earned in illicit proceeds by alleged mastermind Gery Shalon, with the haul stashed in Swiss and other bank accounts. Overall, Shalon and his co-conspirators are believed to have taken in hundreds of millions of dollars through alleged wrongdoing.
75 shell companies around the world were used by those charged as they “operated their criminal schemes” and “laundered their vast criminal proceeds,” prosecutors allege.
30 false passports from 17 nations were among the “approximately 200 purported identification documents,” including fake U.S. credentials, used by the crime ring in its operations.
270 employees in Ukraine and Hungary appear to have worked for the illegal online casino business.
10 publicly traded stocks got a boost from the conglomerate’s “email promotional campaigns,” a New York company was told in around June 2011. The conglomerate said the emails — thought to have used stolen addresses — resulted in “substantial trading volume in ten particular publicly traded stocks,” the indictment says. That’s just part of the alleged pump-and-dump activity.
30 U.S. states: Shalon in January 2010 arranged to mail out advertisements promoting the Internet casinos to up to 100,000 U.S. residents in more than 30 states, the indictment says.
Also read: New York bank regulator proposes new cybersecurity rules
Eighty million U.S. jobs at risk from automation, central bank official says
Eighty million U.S. jobs are at risk from automation, a central bank official said Thursday.
Bank of England chief economist Andy Haldane, speaking at the Trades Union Congress in London, said 80 million U.S. and 15 million U.K. jobs are in danger of being taken over by robots.
By Steve Goldstein
In October, the U.S. employed close to 143 million people outside the farm sector.
Haldane added the jobs that are most at risk from automation tend to have the lowest wage. “In other words, technology could act like a regressive income tax on the unskilled. It could further widen income disparities,” he said.
He did allow that, in past experience, technological advances end up boosting demand for new goods from new industries requiring new workers.
“Yet the smarter machines become, the greater the likelihood that the space remaining for uniquely-human skills could shrink further,” Haldane said. He said what was previously unthinkable even a decade ago is now reality, like a driverless car.
Being a central banker, Haldane further pointed out that the narrowing of slack is having less impact on wages than in the past. “That might arise because technology has made it easier and cheaper than ever before to substitute labor for capital, man for machine,” he said.
He said the case for raising interest rates in the U.K. “is still some way from being made.”
support by ZATco & 20News
BlackBerry has a ton of positives going for it, but continued focus on its handset business rather than other areas of the company continue to feed the negative narrative. The reality is that real buyers are stepping back into BlackBerry. From a valuation standpoint, BlackBerry Ltd looks great, but that's not why buyers exist.
By Thomas H. Kee Jr.
The valuation looks great because the company has $3 billion in cash, $1.7 billion after accounting for debt, $473 million of free cash flow, and a market cap of only $4.3 billion. The market cap of BlackBerry BBRY, +0.13% less cash is $2.5 billion, which is less than revenue, which suggests that BBRY is realizing 18.9% of its cash-adjusted market cap as cash flow right now.
Think about that. If there's no growth in BBRY, the cash flow alone should produce about double-digit growth in the years ahead.
Revenue is $2.6 billion, and although revenue has declined in recent years, the company, who had been forecasting declining revenue all through that declining period, suggested that not only would revenue stabilize, but they would finally start to improve from the most recent quarterly report.
We call that a turning point.
Everything aside, BBRY does not look like a company that is poised to implode on a financial-metric basis, but the company has also taken integral steps to solidify businesses in the mobile-security space, it’s winning thousands of customers, has integrated mobile security into more cars than all of its competition combined, and although media loves to portray BBRY as being a company that may not survive, that's clearly far from true.
Unfortunately, that has driven investor sentiment. Investors never like to hear negatives, and there have been enough negative news from BBRY over the years to make even the strongest investors question themselves, but the financial metrics are sound, and no matter what happens valuation analysis that is based on those metrics is as well.
By Thomas H. Kee Jr.
That shifts the scales.
Now, those 78 million shares that are short have something to worry about. In many ways, some of those short sellers were enticed by the media to take positions because they believed that BBRY was going to $0, falling apart, and beyond repair, but as all of these negative influences played out over the past few years John Chen has done a great job of curtailing all of those negatives, and repositioning the company, but that does not mean neglecting past businesses.
The focus of almost all investor attention is the handset business, even though it is less important to BBRY than it ever was. This attention also is what influences sentiment, especially when headlines exist that suggest BBRY may exit handsets, but that will never happen in our opinion.
BBRY produces a vertical channel of mobile security and an integral part of that is the handsets. If for no other reason than to demonstrate capability and sell to governments, BBRY will always be in the handset business in my opinion, but that can be taken a step further now.
Immediate valuations place no value on the new BBRY Smartphone, the PRIV. In fact, I would go so far as to say that investors believe the PRIV will be a flop. The interesting part is that this is already seen as a negative catalyst, a non-winner if you will, and the improved revenue projections do not suggest a robust reception for PRIV at all, which changes the dynamic completely.
If it can't be a negative, could it be a positive?
As I have said before, the handset business continues to be a wildcard for BBRY. The company has already stabilized, integrated mobile security businesses are already growing, valuation is already good, growth rates are already quantifiable, significant short interest is already there and may need to cover, and the PRIV was just released.
The PRIV cannot be a negative, that's already been built in, but it can be a huge positive. I am not sure if it will come, but if there is even a slight hint that the PRIV is being received well on a global basis BBRY is going to spike even more than it has over the past week or so.
In my opinion, BlackBerry is back. Investors should take notice.
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Workers aren’t quitting to take up the surge in available jobs
There’s good and bad news in the latest job openings and labor turnover report.
The good: the number of open jobs rose in September to the second-highest level on record. Job openings climbed to a seasonally adjusted 5.53 million from 5.38 million in August, the Labor Department said Thursday.
The bad: the quits rate stayed at 1.9% for the sixth month in a row. That’s still below the 2.1% average in the year before the Great Recession ravaged the U.S. economy.
By Steve Goldstein
Workers quitting in greater numbers is viewed as a sign of confidence because it indicates they can find another — perhaps better paying — job. Federal Reserve Chairwoman Janet Yellen said she pays close attention to this measure to help assess the health of the labor market.
Two explanations could explain the paradox.
One is that employers aren’t offering high enough pay to fill these spots. Keep in mind that the report covers September. The good news on the pay front came in the employment report for October, when average hourly earnings saw the biggest year-over-year gain since 2009. Yet that was just one month, so there’s a possibility of a one-month anomaly. Furthermore, the 2.5% growth in average hourly pay isn’t anything to write home about.
By Steve Goldstein
The other is a so-called skills mismatch. With the unemployment rate cut in half from its peak, the available pool of labor isn’t as desirable as before. The long-term employed lose skills while sitting out of the jobs market, which makes it difficult for employers to find the right talent. Most polls of executives highlight that problem as a leading concern of businesses.
Other findings from the report show that growth in job openings came from relatively high-paying business services and from relatively low-paying retailers.
Euro trades at highest level in a week as Yellen avoids rate-hike talk
Investors are looking ahead to remarks from Fed’s Fischer
The euro traded at its highest level in a week Thursday, as Federal Reserve Chairwoman Janet Yellen’s reluctance to discuss the central bank’s interest-rate outlook made dollar bulls nervous.
By Joseph Adinolfi
The euro traded at its highest level in a week Thursday, as Federal Reserve Chairwoman Janet Yellen’s reluctance to discuss the central bank’s interest-rate outlook made dollar bulls nervous.
In her opening remarks to a two-day research conference sponsored by the Fed, Yellen said nothing about the possibility of an interest-rate increase at the Fed’s December policy meeting.
Yellen’s decision to sidestep specific talk about a possible interest-rate increase helped spark a bout of short-covering that pushed the euro higher throughout the day, said Doug Borthwick, the head of foreign exchange at Chapdelaine & Co.
“The market wants them to talk about the elephant in the room,” Borthwick said. “They’re not saying a rate hike is off the table in December, but they’re not reinforcing it.”
Richmond Fed President Jeffrey Lacker also neglected to discuss interest rates in a speech made Thursday morning, Eastern Time.
The shared currency traded at $1.0814 late Thursday in New York, an increase of 0.4% from $1.0764 late Wednesday.
Official data showing that job openings rose to the second-highest level on record in September briefly helped support the dollar. But ultimately, uncertainty about the Fed won out.
By Joseph Adinolfi
In its most recent policy statement, the Fed’s rate-setting committee stressed that it would need to see signs that the labor-market recovery is progressing to justify a hike at its December policy meeting.
“The labor market is definitely tightening,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management. “And the October NFP finally showed a significant uptick in wages.”
Earlier in the session, the euro briefly fell below $1.0691, a level not seen since April, according to FactSet, as European Central Bank President Mario Draghi once again suggested that the ECB would expand its massive asset-purchasing program in December.
Investors are now looking ahead to remarks from Federal Reserve Vice Chairman Stanley Fischer, who is expected to begin speaking at 6 p.m. Eastern.
In other currency trading, the buck fell to its weakest level against the yen since Friday’s jobs report, trading at ¥122.57 late Thursday, compared with ¥122.85 late Wednesday. It also edged lower against the British pound .
The ICE U.S. Dollar , a measure of the dollar’s strength against a basket of six of its rivals, declined by 0.5% to 98.5450.
U.K. stocks end at lowest level in more than a month
Commodity stocks, Rolls-Royce tumble; Burberry lifts interim dividend
U.K. stocks fall Thursday, with commodities under pressure and Rolls-Royce Holdings sinking on the back of a profit warning from the aero-engine maker
By Carla Mozee
British blue-chip stocks dropped by the most in six weeks on Thursday, leaving the benchmark FTSE 100 at its lowest level in more than a month.
Commodity shares slumped as metals prices slid, while Rolls-Royce Holdings PLC shares sank on the back of the aircraft-engine maker’s profit warning.
Only five shares on the FTSE 100 finished higher. The performance left the benchmark down by 1.9%, the sharpest percentage loss since Sept. 28, FactSet data showed. Its close at 6,178.68 was the worst since Oct. 2.
For the FTSE 100, “we’ve been going sideways basically for a month” and “the fact that we’ve dropped through 6,250, to me, is a bit of a gamechanger,” said Jasper Lawler, market analyst at CMC Markets. “It speaks to some weakness to come.”
The FTSE 100 was on track for a weekly fall of 2.8%. It is down 13% since hitting an all-time of 7,103.98 on April 27.
All but the utilities sector fell Thursday, with a 4% drop among miners. Gold prices were trading at their lowest in about five years, “which in and of itself isn’t an issue, but it is matching similar drops in copper and oil. Commodities are reacting to the downside ahead of equities in worry over a potential Fed rate hike in December,” Lawler said.
Copper producer Antofagasta PLC lost 4.9% as copper futures fell more than 2%. Anglo American PLC shed 8.7% and Glencore PLC ended down by 7.6%.
By Carla Mozee
Oil prices
stumbled by more than 2%. That pressured shares of major oil companies BP PLC and Royal Dutch Shell PLC , which fell 2.8% and 2.5%, respectively.
U.S. stocks were hit hard Thursday, as well, after St. Louis Fed President James Bullard said “prudence alone” suggests the Fed should be nudging up interest rates and shrinking its balance sheet back towards more “normal settings.”
Aerospace activity: Rolls-Royce shares tumbled 19%, marking the biggest plunge since a 22.4% tumble in August 2000. The sharp selling was triggered after the company said it may cut its dividend as it downgraded its earnings outlook for this year and next.
Rolls-Royce, which produces aircraft engines for Boeing Co. 787 Dreamliners and Airbus Group SE A380 superjumbos, said its “negative outlook reflects sharply weaker demand in 2016, including in wide-bodied aftermarket, corporate and regional aerospace markets and offshore marine.”
Rolls-Royce shares have fallen for six straight sessions.
Shares of aerospace, defense and energy group Meggitt PLC were down 3.2%. Meggit last month issued its own profit warning. Also under pressure Thursday was engineering services provider Smiths Group PLC , as its shares gave up 5.1%.
Aerospace industry heavyweight BAE Systems PLC on Thursday also cut its earnings outlook for the year and said it would cut more jobs, but its shares bucked the losing trend to rise 3.8%.
Other movers: Meanwhile, International Consolidated Airlines Group SA fell 2.4%. The British Airways parent launched a 1-billion euro ($1.08 billion), two-tranche convertible bond offering on Thursday.
Burberry PLC shares reversed gains and fell 1.7%. Earlier Thursday, the luxury-goods maker reported a 14% rise in first-half profit and raised its interim dividend by 5%, despite flat revenue.
U.S. stocks ring up losses as Macy’s disappoints, energy sector slumps
A 14% decline of shares in Macy’s may be a bad omen for retailers
U.S. stocks ended Wednesday’s session lower as a selloff in energy shares that was triggered by a drop in oil prices weighed on the main indexes.
By Anora Mahmudova
U.S. stocks ended Wednesday’s session lower, as disappointing quarterly results from Macy’s and a selloff in energy stocks weighed on the major stock-market indexes.
“Markets are a little bit fatigued after charging higher since late September, which saw the S&P 500 retrace all of the falls since China first announced currency devaluation,” said Ryan Larson, head of equity trading at RBC Global Asset Management.
“It’s not uncharacteristic for markets to pause in a week light on news and catalysts,” Larson said.
Market participants said trading volumes were lower than usual as bond markets and banks closed in observance of Veterans Day.
The S&P 500 gave up 6.72 points, or 0.3%, to close at 2,075.00. Energy, off 1.9%, and health-care, 0.9% lower, led losses. The broad-market index has been down five of the past six sessions. A nearly 3% tumble in West Texas Intermediate crude oil, sparked by a renewed concern of a U.S. supply gut, resulted in oil prices sinking below $43 a barrel.
The Dow Jones Industrial Average shed 55.99 points, or 0.3%, to close at 17,702.22. The Nasdaq Composite ended the day down 16.22 points, or 0.3%, at 5,067.02.
The most recent moves by U.S. stocks suggest “that markets have finally priced in Friday’s nonfarm payrolls surprise and the potential for a more hawkish Fed,” said Colin Cieszynski, chief market strategist at CMC Markets, in a Wednesday research note. The blowout October jobs report released Nov. 6 is widely viewed as having given the Federal Reserve the green light to raise rates next month.
In corporate news, Anheuser-Busch InBev NV early Wednesday said it had formally agreed to buy SABMiller PLC for about $106 billion, as SABMiller agreed to sell its 58% stake in the MillerCoors LLC joint venture to its partner Molson Coors Brewing Co. . That sale of MillerCoors is necessary for AB InBev to get approval from U.S. regulators to buy SABMiller. Molson Coors Brewing shares rose 4.4%, while American depositary receipts of Anheuser-Busch rose 2.2%.
By Anora Mahmudova
“The merger news between brewers and record corporate debt issuance suggests there is more M&A activity to come, which should be supportive for the market, as companies usually pay a premium when buying other companies,” said Chris Gaffney, president at EverBank World Markets.
However, Gaffney warned that if earnings growth and consumer spending don’t improve over the next few quarters, markets may need to reprice.
“We saw wage inflation in the last jobs report but it’s only one report. Consumers will need to start spending their savings from lower gasoline prices. If it doesn’t happen, we might see another correction,” Gaffney said.
Individual movers:
Macy’s Inc. shares closed about 14% lower after the retailer reported weaker-than-expected third-quarter sales and cut its guidance for the year. The department-store chain said it won’t pursue a spinoff of its real-estate assets.
Also read: Investors fear Macy’s is a red flag for other retailers
Meanwhile, oil companies faced another selloff as crude-oil futures dropped sharply on rising supply fears. Oil futures fell 2.9% to settle at $42.93 a barrel. Among biggest decliners on the S&P 500 were Marathon Oil Corp. and Cabot Oil & Gas Corp which both fell nearly 8%.
Read: What falling copper prices say about the world economy
Other markets: Asian stock markets closed mostly higher, and European stocks finished higher. China’s industrial output rose 5.6% in October, below expectations and suggesting the worst may not be over as that economy decelerates.
Gold futures settled lower, falling 0.3%, to $1,084.90 an ounce, it’s lowest level in more than five years. The U.S. Dollar Index, a measure of the dollar’s strength against a basket of rivals, dropped 0.3% to 98.970.
Sheep-like thinking over a Fed move could send investors over a cliff
Critical intelligence ahead of the U.S. market’s open
The “sure-thing” Fed rate increase for December isn’t such a done deal for some strategists. They’re still making the case for no move in December. Are you ready?
By Barbara Kollmeyer
So has the market finally settled down to a Federal Reserve hike in December? Maybe. Investors will still keep a close eye on Friday’s retail sales update, which could bolster the apparently ironclad case for an interest rate rise.
Ironclad? Tell that to the contrarians out there. Like Ryan Detrick, who says history is on his side when it comes to the theory that the Fed won’t act before the year is done. More on that in our call of the day.
No matter how comfortable this market is with a winter hike, it doesn’t hurt to review the “what-ifs” in case the decision goes another way.
“The market is saying 60%-ish likelihood,” and if the wind doesn’t get sucked out of this market, the Fed will go ahead with that hike, says Steen Jakobsen, chief economist at Saxo Bank. If the Fed fails to move, he says the market “will take it really bad,” even though a rate rise will probably crush growth in 2016.
And if you’re positioning for no hike? Russell Investment’s strategist Wouter Sturkenboom says emerging-market equities in resource and energy-sensitive sectors would do well, as the dollar would sell off. Then he points to U.S. equities, followed by real-estate investment trusts and infrastructure stocks. Plus, Bank of America Merrill Lynch suggested last week that emerging markets and gold miners were a no-hike play.
Check out our chart of the day, after China dropped a whole bunch of data earlier. Woe is Dr. Copper.
Key market gauges
The Veterans Day holiday is shuttering bond markets, but that’s not stopping a nice pickup for Dow and S&P 500 futures are mildly higher. Mild also describes what went on in Asia, even as Chinese data showed slowing industrial output and better-than-expected retail sales. The Shanghai Composite closed up 0.3%. Europe is doing better, up about 0.5%.
Crude prices
are under pressure on expectations for a sharp rise in U.S. stockpiles later. That comes after American Petroleum Institute data last night showed a big spike. Gold is tipping south and the dollar is giving up some ground.
The call
In a blog post earlier this week, Sam Stovall at S&P Capital IQ points out that the Fed has raised interest rates in December five times since the end of World War II — 1965, 1968, 1980, 2004 and 2005). Not just that, the Fed isn’t afraid to hike interest rates ahead of a presidential election, he writes, with the central bank having hiked six times in the third quarter of a presidential year.
However, Detrick, market strategist for Kimble Charting Solutions, points out that the Fed has never raised rates in December in a pre-election year. He notes that after prior December rate hikes, the S&P 500 has lost about 3.5% over the next six months, on average. But after all other Decembers since 1950, the index has gained 4.1% in the same period.
“My take hasn’t changed, they aren’t hiking. The Fed hikes in December after strong returns and right after an election, not ahead of an election with weak stock market performance” says Detrick.
The quote
“Taxes too high. Wages too high. We’re not going to be able to compete against the world. I hate to say it, but we have to leave it the way it is.” — GOP contender Donald Trump on the minimum wage at last night’s Republican debate.
And his rival Ben Carson had this to say on the topic: “I would not raise it specifically because I’m interested in making sure that people are able to enter the job market.”
Check out our live-blog recap of the debate for more highlights.
$7.68 million — Joe McKeehen, 25 years old, took home that chunk of change last night after winning the World Series of Poker’s championship in Las Vegas.
By Barbara Kollmeyer
The buzz
It’s Singles’ Day in China — the big online shopping day — so watch Alibaba for reaction. In the first 90 minutes of shopping Wednesday, Alibaba busted past $5 billion in gross merchandise volume, which compares to $2 billion in sales in the first hour last year.
Pandora could carry on with its afterhours rise after reports the online-radio company is about to expand internationally.
Meanwhile, retailers are struggling to deal with piles of unsold merchandise. That could mean a bonanza for shoppers, but not be so good for the bottom lines of those companies, says The Wall Street Journal.
On the beer beat, AB InBev has sealed a $106 billion takeover for SABMiller . Five ways this deal is going to skunk your beer.
Carlsberg , meanwhile, is cutting 2,000 jobs.
Safeway looks set to cut ties with startup Theranos after spending about $350 million to build clinics to offer blood tests, which never got off the ground.
Apple got kicked in the teeth yesterday thanks to a gloomy Credit Suisse view on growth. Stocktwits co-founder Howard Lindzon posted a brief blog a couple of days ago, showing off a picture he took on his iPhone 6S.
Lindzon said that it’s tough to place a value on Facebook’s Instagram or Apple “with the magic they create,” and why when the stocks fall, there will be buyers to scoop them up.
“They are more than ‘daily habits,’” he said.
shares slid 8.5% after sales fell short and the company cut its full-year outlook. Meanwhile, J.C. Penney shares are up over 9% after
There was a whole crop of mixed-bag China data out today. But if you want to really know what’s happening in the world’s second-biggest economy, a couple of things are telling. One is beaten-down copper . The metal has hit a six-year low recently, and that’s not a sign of cheer at its big global customer China, says Wolf Richter at the Wolf Street blog.
The country needs copper to keep its growth white-hot, but there are signs it is whittling down demand.
“Copper has plunged 22% year-to-date from the already low levels at the beginning of the year. It has lost more than half its value since the days of hope in early 2011,” writes Richter. Copper’s savior isn’t going to be China, so then who? Bad news for copper bugs.
Goldman says U.S. economic recovery has about 4 years before it ends
A team of researchers at Goldman Sachs say there is a 60% probability the recovery will last 10 years
Investors who worry that the U.S. economy is speeding toward another inevitable recession can relax: the likelihood that the recovery will continue is actually pretty good.
By Joseph Adinolfi
Investors who worry that the U.S. economy is speeding toward another inevitable recession can relax: the likelihood that the recovery will continue is actually pretty good.
That is according to a team of researchers at Goldman Sachs Group, led by Chief Economist Jan Hatzius. The team analyzed a data set of developed-market business cycles and their findings were pretty interesting.
Among developed economies, the average length of an economic expansion has been expanding since 1950. The longest U.S. expansion lasted 10 years, from 1991 to 2001.
Before 1950, the average expansion lasted about three years, with only a few enduring for 10 years or more.
Since 1950, periods of expansion in developed markets have lasted an average of eight years—though the average in the U.S. over the same time has been around five years.
Goldman created a scatter plot of 255 expansions across 14 developed economies, depicted below:
By Joseph Adinolfi
The distribution of expansions durations is “fat tailed.” In other words, there have been many short expansions, but also many longer ones.
This implies that the current expansion, at six and 1/3 years old, will likely endure, Goldman says. The current expansion started in July 2009, according to the National Bureau of Economic Research.
The investment bank pegs the probability of the recovery enduring for another three and 2/3 years at 60%. That calculation only includes data from expansions after 1950.
The following chart outlines the probability of the recovery’s survival up to, and beyond, that 10-year milestone.
Goldman is careful to note that these probabilities represent a general picture—like an actuarial table of life expectancies. They shouldn’t be mistaken for a thorough analysis of the economy in its current state.
But the historical record is no doubt encouraging.
“Although there are clearly some risks to the US economy—especially from developments abroad—we do not expect the expansion to expire of old age,” the researchers said.
And the odds of a recession beginning over the next year are about 10% to 15%, according to the data.
Where long-term yields are heading after a Fed rate hike
Why a taper tantrum over the Federal Reserve could be history
The market views a December rate hike as pretty much a done deal. But the outlook for long-term rates, mainly the 10-year and 30-year benchmark Treasury yields, is far less certain.
Short-term Treasury yields recently hit their highest level in five years as investors brace for an interest-rate hike by the Federal Reserve in December.
By Ellie Ismailidou<.b>
Short-term Treasury yields recently hit their highest level in five years as investors brace for an interest-rate hike by the Federal Reserve in December.
Given that the market views a December rate hike as pretty much a done deal, the question is shifting to what this means for Treasurys, mainly the yields on the benchmark 10-year note and the 30-year bond, known as the long bond.
Yields on both 10-year and 30-year benchmark Treasurys have reached four-month highs and are now within striking distance of their 2015 highs of 2.5% and 3.2%, respectively.
Bond markets reacted quickly to Fed officials’ hawkish comments as well as the stellar October employment report and other economic data that surpassed forecasts. As yields climbed, so did mortgage rates.
But from a technical perspective, a breach above these yield levels and a sustained higher range would require “another catalyst,” Anthony Valeri, investment strategist for LPL Financial, wrote in a note Thursday. He said he can’t see now what that could be.
“We do not believe a repeat of the 2013 bond sell-off, known as the taper tantrum, is in store for investors…The main difference is that a rate hike is now expected, unlike 2013 when the Fed caught investors off-guard with the mere suggestion of ‘tapering’ bond purchases,” Valeri said.
Deutsche Bank analysts have built a model to predict what the 10-year yield will do once the Fed starts raising rates. It says Fed rate hikes will pull long-term rates higher next year.
Come 2017 and 2018, increases in the Fed-funds rate will have a much smaller effect on the 10-year Treasury yield, according to Deutsche Bank’s model.
In fact, as the following chart shows, the 10-year yield is expected to remain under 4% even as the Fed tightens—and 4% is already well below the average 10-year rate over the past 20 years.
By Ellie Ismailidou<.b>
One big reason is that inflation and inflation expectations are much lower than they have been over the past 20 years. The Deutsche Bank model also takes into account factors like expectations for economic growth, purchases of U.S. Treasurys by foreign official institutions, Fed asset purchases and bond-buying by the European Central Bank and the Bank of Japan.
Other interest-rate strategists are expected to issue their forecasts as part of their 2016 outlooks, likely to be released over the next month.
One factor that could affect yields is how the Fed’s December policy statement addresses the pace of future rate hikes, said David O’Malley, chief executive of Penn Mutual Asset Management.
“Will the Fed’s language focus on being slow and methodical or on setting a more specific time frame, such as keeping [Fed-funds] rates at a level before raising again? These are the questions that will determine the path of interest rates in 2016,” O’Malley said.
In recent Fed speakers’ comments “we’ve encountered overtures about a path to normalization that means perhaps a steadier pace [of future hikes] than we had heard just a few month before,” said David Ader, head of government bond strategy at CRT Capital Group, in a note on Thursday.
On Thursday, however, two Fed officials said the U.S. central bank might not be able to stick to its pledge of gradual rate hikes once they start raising interest rates.
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