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Yellen keen to start raising US rates but deflation dangers abound

• SAM WYLIE
  
• THE AUSTRALIAN
  
• SEPTEMBER 28, 2015 12:00AM
  

[Image: 199342-4bc81250-64d4-11e5-ae2c-91350e74fa5b.jpg]
US Federal Reserve chairwoman Janet Yellen. Source: AFP
[b]The 90th birthday party of Milton Freidman, the great monetarist economist and Nobel Laureate, was held in 2002. Ben Bernanke gave the keynote address, at the end of which Bernanke made a solemn promise. Speaking directly to Friedman, Bernanke said: “You were right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”[/b]
Do what again? Bernanke was referring to the Fed’s raising of interest rates during the Great Depression. He was promising that the US Federal Reserve would never again be the cause of deflation and a collapse in the economy by tightening monetary policy too early in an economic recovery.
By not raising rates this month, Janet Yellen, who is Bernanke’s successor as chairwoman of the Fed, continued to honour his pledge to Freidman. But Yellen’s stated intention is to start raising interest rates before the end of the year and perhaps as soon as the Fed’s next meeting on 28 October.
Yellen’s central motivation for raising rates, despite the obvious risks, is to “get back to normal”. The collapse of Lehman Brothers on September 15, 2008, was a fast motion train wreck.
Many parts of the economy were badly broken, but they are now mostly fixed: the banking system is better capitalised than before the crisis; the US budget deficit is back to normal levels; stock, bond and real estate prices are if anything too high; joblessness is down to 5.1 per cent and annual GDP growth has been close to its long-term trend for more than a year.
Only two things remain broken. Firstly, monetary policy, with short-term rates still near zero and the Fed’s balance sheet grotesquely distorted by quantitative easing. Secondly, consumer and business confidence.
Yellen believes that the first begets the second. If interest rates could get back to normal then the GFC would be fully in the rear vision mirror for US households and businesses. The crisis sentiment that has dogged the economy since 2007 would then finally lift and the final piece — confidence — would fall into place.
Ideally, the growing US economy, combined with green shoots of growth in Europe, and falling energy prices will counter a slowdown in developing economies and allow the global economy to finally reach escape velocity from the GFC.
But many economists consider that happy talk and fear that Yellen may later this year make a mistake of historic proportions. They worry that the Fed is severely underestimating the strength of deflationary forces in the global economy. Inflation fell rapidly in every major economy last year. That was the third episode of rapid disinflation since the GFC started. The first two episodes were met with massive rounds of government spending and quantitative easing. Inflation has stabilised this year but is still close to zero in the US, even closer in Europe and negative in Japan and Britain.
Much of the developed world is horrified by Yellen’s intentions and are implementing policies that are the polar opposite. Japan is full steam ahead with its crash or crash through QE program.
The European Central Bank, under governor Mario Draghi, intends to continue its €60 billion per month QE program until healthy levels of inflation are restored.
Larry Summers, who was President Barack Obama’s first choice as Bernanke’s successor, believes that deflationary forces have been building for decades and that the GFC is in part a result of those forces rather than the cause.
Summers popularised the term “secular stagnation”, which refers to an enduring state of supply of goods exceeding demand. The dearth of demand is resulting from the greying of populations, the shift of high-paid jobs in the developed world to low-paid jobs in developing countries, and the concentration of wealth in families who save more than they spend. The excess of supply is resulting from technological improvements and globalisation.
The central tension in the decision about when to raise interest rates is that Yellen gives primacy to the need to “fix the last piece” to finally restore US economic confidence, whereas her detractors worry that the Fed “doesn’t get it” about global deflation.
As much as I admire Yellen and her determination to get the GFC behind us, I am in the Summers and Draghi camp — deflation is not defeated and poses a grave danger to the global economy. Janet Yellen might do well to reaffirm Bernanke’s promise.
Sam Wylie is a Principal Fellow of the Melbourne Business School

DJIA staged the biggest reversal in 4 years +200 at close after down 258 intraday...

US economy's jobs slowdown raises doubts about interest rate rise
Labour department’s lower than expected September jobs data reveals 64,000 fewer jobs than forecast, making a rate rise by Federal Reserve less likely

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 Janet Yellen, chair of the US Federal Reserve, had expected interest rates to rise before the end of the year. Photograph: Mary Schwalm/Reuters
Jana Kasperkevic in New York and Phillip Inman
Saturday 3 October 2015 03.58 AESTLast modified on Saturday 3 October 201509.05 AEST

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A slump in world trade and a slowdown in China took their toll on the US economy last month as surveys revealed that firms delayed hiring and factory orders contracted.
US businesses created only 142,000 jobs in September, according to official figures, about 64,000 fewer than expected by analysts. The report by the US Labor department also found that employers kept average pay rises at zero and thousands of workers quit the labour market, taking the participation rate back to levels last seen in the 1970s.
The much anticipated data was widely seen as ending any expectations of aninterest rate rise by the US Federal Reserve before Christmas.
The lack of any pressure on wages is likely to be the biggest factor persuading Fed officials against a rise from the current rate of near zero, which was anticipated last month until it became obvious that the slowing Chinese economy and the panic it caused on global markets formed a powerful case against a rate rise.
US jobs report: markets volatile as payroll misses forecasts - live updates
Fewer jobs were created than expected in America last month, more people quit the labor force, and wage growth was disappointing

 
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Separate surveys added to the gloomy picture, showing that US factory orders fell 1.7% in August, compared with expectations of a 1.3% decline, and business activity in New York contracted for the first time in eight months in September.
The Dow Jones fell more than 200 points on the news. By midday, Dow Jones, Nasdaq and S&P 500 had recovered from their initial shock and were back in green. The Dow Jones closed with a 200 point gain. The FTSE 100 shrugged off the news as investors welcomed the prospect of ultra-low interest rates until at least next year. The index of Britain’s top 100 companies closed up nearly 1% at 6,129 points.
James Marple, senior economist at TD Bank, said: “The weakness in the global economy is washing on to American shores.”
Gus Faucher, senior macroeconomist at stockbroker PNC, said he was not taking much solace from the US unemployment rate remaining at 5.1% when it was only because the US labour force participation declined to 62.4%, from 62.6%, during the past three months. This is the lowest labour force participation rate since 1977.
“There is no question that this is a disappointing report. Normally, if you get this kind of a report, you might find some silver linings in it. There is nothing here that I would point to as a silver lining,” Faucher said on Friday.
“Unemployment rate was steady but we still had big declines in the labour force. Average hourly earnings were flat. We got downward revisions to July and August and pretty substantial ones.”
Last month, the non-farm payroll figures for June and July were revised up, causing the unemployment rate to drop to 5.1%. August’s numbers were lower than expected, although many economists pointed out that the figures for August are usually revised up. However, in Friday’s report, the figures for both July and August were revised down.
July’s figure was revised from 245,000 to 223,000, and the change for August was revised from 173,000 to 136,000, meaning that 59,000 fewer jobs were created than previously reported.
Over the last three months, job gains have averaged 167,000 per month. Last month, that figure was reported to be 221,000.
So far in 2015, job growth has averaged 198,000 per month, compared with an average monthly gain of 260,000 in 2014, according to the US Labor department.

Janet Yellen, chair of the US Federal Reserve, said in September that continued job growth and 2% inflation would indicate that the US economy was ready for a hike in interest rates.
Yellen has said she expected that interest rates would be raised before the end of the year if the US economy continued to show signs of improvement.
The US markets have been on a wild ride during the last couple of months thanks to China’s market turmoil, Greece’s debt crisis and the uncertainty about the interest rate hike. In her press conference announcing that the Fed would not raise interest rates in September, Yellen said the slowing of China’s economy had long been expected and that it was not the Fed’s policy to respond to ups and downs in the markets.

IMF warns of new financial crisis if interest rates rise

 
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“We are not going to see a rate increase in October – we haven’t been expecting one but I think this kind of rules that out,” said Faucher. “That being said, I think that the December rate hike is still on the table. It’s looking certainly more iffy than it did even just a few days ago. If I were on the federal open market committee [of the Federal Reserve], I’d be looking very closely at this report and thinking very hard about whether I want to raise rates in December.”
Jim O’Sullivan, chief economist with High Frequency [url=http://www.theguardian.com/business/economics]Economics, agreed that the Fed will hold steady this month, but said there are two more jobs reports before it meets again in December.
Faucher said September’s weak jobs report is only a temporary weakness. “The thing that puzzles me is that other indicators have looked very solid in late September. Housing market, generally, is looking good. Consumer spending is good. We had a great number on auto sales yesterday,” he said. “So there seems to be a disconnect between what we are seeing in the economy and what we are seeing in the labour market.”

US interest rates will start rising despite soft employment data

• VICTORIA THIEBERGER
  
• THE AUSTRALIAN
  
• OCTOBER 05, 2015 12:00AM
  

[b]Investors need to stop deluding themselves that US interest rates are not going to start rising in the near future, irrespective of one soft payrolls report.[/b]
At present, the futures market is putting a mere 30 per cent probability on the Federal Reserve moving in December to put through the first rate increase in nearly a decade.
The economic data support a move — and indeed supported a hike last month. Whether unemployment is at 5.1 per cent or 5.2 per cent, the labour market is at or close to full employment. Friday’s payrolls report showed a softening in September, but Fed officials have stressed the cumulative improvement over the past three years (and three million jobs in the past year).
One bright spot in the payrolls report was nearly half a million part-time workers moving into full-time employment, a huge one-month gain in a measure closely watched by the Fed and one that may have dampened headline jobs growth. Underemployment is at its lowest since May, 2008.
Speaking on the weekend, a Fed official, San Francisco Fed president John Williams, played down the weakness, saying growth of 100,000 payrolls a month was enough to keep pace with new entrants to the job ­market.
Take US car sales figures: Bespoke Investment Group notes that sales of F-series Ford trucks in September hit their highest level since September 2006. Total year-to-date sales are also the strongest since 2006.
Bespoke likes to track sales of pick-up trucks because they are often a sign of strength or weakness in the small business and construction sectors. Both industries “appear to be doing just fine”, Bespoke says. Cars are big-ticket purchases and the ructions in markets in August had no apparent effect on sales in September.
Consumer spending is strong, growing at about 3.3 per cent compared with less than 2 per cent two years ago. Certainly during my trip around stores in the northeast of the US consumers waiting patiently in long lines at cash registers in a range of stores for clothing, shoes, books and electronics. I wouldn’t normally spend 15 minutes waiting in line to try on clothes, but plenty of other women were. Anecdotal evidence is just that, but three years ago the same stores were deserted.
The problem for US retailers is that the popular chains are foreign-owned — Zara, H&M and Uniqlo among others — while mainstays of a decade ago like Gap are struggling, as one adviser to hedge funds that invest in retail told me. But from a macro perspective, money is still being spent, with real interest rates in negative territory.
The latest slide in oil prices will probably give another fillip to spending via lower fuel costs, while continuing the divergence between headline inflation and core inflation.
As Cleveland Fed president Loretta Mester revealed in an interview, there are incipient signs from employers that wages are starting to follow the tightening in labour across many industries, not just in-demand occupations.
Employers’ and workers’ confidence about pay rises is improving, with a key survey from the Conference Board showing the share of Americans expecting an increase in income in the next six months rose to 19.1 per cent, the second-highest reading in five years.
Where doomsayers like Larry Summers are so mistaken is in assessing the risks of deflation. Inflation is not about to surge in the recovering US economy, but nor is it about to renew a slide down to zero.
The greater risk than deflation is ultra-low rates continuing to fuel excessive risk taking, and central bankers are beginning to voice concerns on this front. San Francisco Fed’s Williams cites imbalances in high real estate prices that are tripping the alert system; other Fed officials are worried about financial excesses that are only getting worse the longer rates remain at zero.
Low interest rates “subsidise Wall Street private equity and activist investors, bent on quick payouts as opposed to positioning companies to innovate and grow,” warns University of Maryland economist Peter Morici.
The Federal Reserve sets policy for the US economy, and a modest quarter-point increase will not derail growth at home. Holding steady for fear of emerging-market weakness is not sustainable indefinitely. If financial markets still fail to believe the unwinding of extreme policy settings is within reach, they will face another rough landing.

• OPINION
   
  
  
•  Oct 5 2015 at 11:15 AM 
  

The financial risk nobody is paying attention to

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[img=620x0]http://www.afr.com/content/dam/images/g/j/x/t/4/f/image.related.afrArticleLead.620x350.gjxt4w.png/1444006042105.jpg[/img]A devastating inflationary breakout could be just around the corner. John Shakespeare
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by Christopher Joye
The shocks keep on coming. First, "Grexit", then the China crash, followed by the US Federal Reserve's anxiety-inducing failure to lift rates, the global ructions caused by the extraordinary Volkswagon scandal and, in the final days of September,Glencore's apparent implosion, which triggered a 4 per cent, single-day loss in Australia's resource-exposed equities.
With so much confusing noise and exogenous event risk that cannot be controlled, it pays to focus on fundamentals. And there is nothing more fundamentally important than the performance of the US economy. It is the world's largest and the most influential marginal price-setter across financial markets, including Australian equities and bonds. Understanding where this $17 trillion behemoth is heading is, therefore, crucial to the outlook for all portfolios.
One of the most striking features of the current US cycle is the rapid rise and sharp fall in the jobless rate from a recent nadir of 4.4 per cent in 2007 to 10.0 per cent in 2009 and then back down to just 5.1 per cent today. Looking over US data since the end of the Second World War, another fact jumps out at you: the inevitability of the fluctuations in the business cycle, notwithstanding the belief that policymakers can mitigate, if not eliminate, its extremities.
If we measure a recession not by the usual yardstick of two quarters of negative growth in gross domestic product but rather by an increase in the jobless rate of 1.5 percentage points or more, there have been 9 downturns since 1950, or about 1.4 recessions every decade.

Perhaps policymakers have succeeded in elongating business cycles, given the frequency of recessions seems to have shrunk to about one per decade over the past 35 years. On the other hand, the amplitude of the downturns has increased: the average 4.2 percentage point rise in the jobless rate since the 1980s is 1.5 times greater than the 2.7 per cent average between the 1950s and 1970s.
Judged by the peak unemployment rate, the global financial crisis (10.0 per cent) was the worst recession the US has endured since the 1982 contraction (10.8 per cent). As a consequence of unprecedented government stimulus, we've also experienced the second-largest fall in the US jobless rate in the past 65 years (specifically, 4.9 percentage points versus 5.8 percentage points in 1982).
FED NOT REMOTELY CLOSE TO UNWINDING
Of course, the Fed has not come remotely close to unwinding its stimulus even though its chair, Janet Yellen, conceded in September that the labour market is all but fully employed. In particular, Yellen said the Fed now believes the so-called non-accelerating inflation rate of unemployment (NAIRU) – the level below which you start getting price pressures – is about 4.9 per cent, or only 0.2 percentage points beneath its current mark. And yet short-term interest rates remain near zero.


Another reliable characteristic of the US economy is the causal relationship between labour market tightness and underlying, or "core", inflation. After you hit full employment, consumer prices inflate more rapidly. A wrinkle is that the NAIRU is constantly shifting and nobody really knows where this line in the sand currently lies.
The good news is that since central banks began explicitly targeting inflation in the 1990s, there has been a clear reduction in both the level and volatility of consumer price movements. This is because central banks' inflation-fighting credentials come to be accepted by both financial markets and the community. Surveys of long-term inflation expectations have been well-anchored during booms and busts.
One of the greatest investment questions of our time is whether we see the return of high and volatile US inflation as the Fed injects excessive stimulus and pushes its jobless rate below the NAIRU. In September, Yellen revealed that the Fed is engaged in precisely this experiment: "A modest decline in the unemployment rate below its long-run [4.9 per cent] level for a time would, by increasing resource utilisation … have the benefit of speeding the return to 2 per cent inflation," Yellen said. It sounds so easy with no unanticipated consequences, including distorted resource allocation and financial system imbalances, in sight.
With a still-modest labour force participation rate and elevated part-time employment, there are reasons to believe the US NAIRU may have dropped, which means it might take a jobless rate with a 3-handle in front of it before bona fide price pressures materialise. Based on the rate of decrease since January 2014, I estimate that event is likely 15 months away.

But when the day arrives, it could be profoundly important if the Fed is forced to junk the prevailing "low rates for long" mantra, which has become a defining bedrock in most portfolios. This is why, while everyone thinks the inflation bogeyman is dead, you should be incorporating a hedge.

More hurdles to clear, before the trade deal materializes...

Historic Pacific trade deal faces skeptics in Congress

ATLANTA - Twelve Pacific Rim countries on Monday reached the most ambitious trade pact in a generation, aiming to liberalize commerce in 40 percent of the world's economy in a deal that faces skepticism from U.S. lawmakers.

The Trans-Pacific Partnership (TPP) pact struck in Atlanta after marathon talks could reshape industries, change the cost of products from cheese to cancer treatments and have repercussions for drug companies and automakers.

Tired negotiators worked round the clock over the weekend to settle tough issues such as monopoly rights for new biotech drugs. New Zealand's demand for greater access for its dairy exports was only settled at 5 a.m. EDT on Monday.

If approved, the TPP pact would cut trade barriers and set common standards for a region stretching from Vietnam to Canada. It would also furnish a legacy-shaping victory for U.S. President Barack Obama, who will further promote the agreement on Tuesday in remarks to business leaders in Washington.

The Obama administration hopes the pact will help the United States increase its influence in East Asia and help counter the rise of China, which is not one of the TPP nations.

Lawmakers in the United States and other TPP countries must approve the deal. Five years in the making, it would reduce or eliminate tariffs on almost 18,000 categories of goods.

Initial reaction from U.S. Congress members, including Democrats and Republicans, ranged from cautious to skeptical.

Vermont Senator Bernie Sanders, a Democratic presidential candidate, warned the pact would cost jobs and hurt consumers. "In the Senate, I will do all that I can to defeat the TPP agreement," he tweeted.

Many of Obama's Democrats, as well as labor groups, fear the TPP will cost manufacturing jobs and weaken environmental laws, while some Republicans oppose provisions to block tobacco companies from suing governments over anti-smoking measures.

Senator Orrin Hatch, a powerful Republican who heads the Senate Finance Committee, was wary. "I am afraid this deal appears to fall woefully short," said Hatch, who had urged the administration to hold the line on intellectual property protections, including for drugs.

U.S. lawmakers have the power to review the agreement and cast an up-or-down vote, but not amend it.

"This is really a 2016 issue for Congress to consider, not a 2015 issue," U.S. Trade Representative Michael Froman said.

CURRENCY, DRUGS, DAIRY, AUTO POLICIES

Ministers said the agreement will include a forum for finance ministers from participating countries to discuss currency policy principles. This takes into account, in part, concerns among U.S. manufacturers and critics who suggest Japan has unfairly driven the yen lower to the benefit of its car exporters and other companies.

But Democratic Representative Debbie Dingell from Michigan, home of the U.S. auto industry, said currency has not been fully dealt with. "Nothing that we have heard indicates negotiators sufficiently addressed these issues," she said in a statement.

The United States and Australia negotiated a compromise on the minimum period of protection to the rights for data used to make biologic drugs. Companies such as Pfizer Inc, Roche Group’s Genentech and Japan's Takeda Pharmaceutical Co could be affected.

Negotiators agreed on terms that fell short of what the United States had sought. Under the deal, countries would give drugmakers at least five years of exclusive access to the clinical data used to win approval for new drugs. An additional several years of regulatory review would likely mean drug companies would have an effective monopoly for about eight years before facing lower-cost, generic competition.

Politically charged dairy farming issues were addressed in the final hours of talks. New Zealand, home to the world's biggest dairy exporter, Fonterra, wanted increased access to U.S., Canadian and Japanese markets.

New Zealand Prime Minister John Key said the deal would cut tariffs on 93 percent of New Zealand's exports to the United States, Japan, Canada, Mexico and Peru. “We’re disappointed there wasn’t agreement to eliminate all dairy tariffs but overall it’s a very good deal for New Zealand,” Key said.

The United States, Mexico, Canada and Japan agreed to auto trade rules on how much of a vehicle must be made within the TPP region to qualify for duty-free status.

The TPP would give Japan's automakers, led by Toyota MotorCorp, a freer hand to buy parts from Asia for vehicles sold in the United States, but sets 25-30 year phase-out periods for U.S. tariffs on Japanese cars and light trucks.

The deal between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam also sets minimum standards on issues ranging from workers' rights to environmental protection.

Trade ministers said the TPP would be open to other countries in the future, including potentially China.

"There is a real opportunity for China to be a part of this," Malaysian Trade Minister Mustapa Mohamed said. REUTERS
http://www.todayonline.com/business/paci...epage=true

What If TPP failed by non-approval in US?

Hillary Clinton's flip-flop on the TPP makes no sense

After months of hinting she might oppose the Trans-Pacific Partnership, Hillary Clinton made it official this week. And her explanation for why she's coming out against the deal now — after years of supporting it — makes no sense.

During her time as secretary of state, from 2009 to 2013, Clinton was a strong supporter of the TPP. CNN has a fun article documenting 45 times Secretary Clinton spoke out in favor of the deal, which was then in the early stages of negotiation. She even said in 2012 that "this TPP sets the gold standard in trade agreements."

Now she sees things differently. In the interview with PBS's Judy Woodruff where she came out against the treaty, she cited two specific objections: It doesn't have language dealing with currency manipulation, and it has provisions that favor big drug companies over patients.

These are totally plausible arguments for opposing the TPP. But they make no sense as reasons for Clinton to change her mind about the treaty.
...
http://www.vox.com/2015/10/7/9474151/hil...-flip-flop

US Fed minutes reveal inflation fears

• JON HILSENRATH
  
• THE WALL STREET JOURNAL
  
• OCTOBER 09, 2015 7:08AM
  

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Fed chair Janet Yellen said financial turbulence had weighed heavily on the decision to keep rates near zero.Source: AP
[b]US Federal Reserve officials held off on raising short-term interest rates at their September policy meeting because they had nagging worries about when inflation would return to 2 per cent after running below their official target for more than three years, according to minutes of the meeting.[/b]
The Fed has twin goals of a robust labour market and low, stable inflation. At the last meeting, which they had earlier signalled could lead to the first interest rate increase in nearly a decade, officials decided they were near their goal of “full employment”, but weren’t yet convinced about inflation. Having approached the job market goal, the minutes suggest the prospective interest rate decision will depend on whether they become more confident inflation won’t continue to undershoot their objective.
“Many members said that the improvement in labour market conditions met or would soon meet one of the (Fed’s) criteria for beginning policy normalisation,” the minutes said. “But some indicated that their confidence that inflation would gradually return to the (Fed’s) 2 per cent objective over the medium term had not increased.”
Start of sidebar. Skip to end of sidebar.

• MOREDollar hits three-week high
  

End of sidebar. Return to start of sidebar.
Fed staff estimated inflation wouldn’t hit the 2 per cent goal even by the end of 2018.
The Fed now faces an additional challenge. Jobs data released since the meeting showed private sector hiring cooled in August and September, introducing new uncertainty about whether the economy is fundamentally down shifting in the face of slow growth overseas and a strengthening US dollar, which is hurting exports.
As Fed chair Janet Yellen emphasised in a press conference following the meeting, turbulence in financial markets and economies abroad weighed heavily on the decision to keep rates near zero, where they have been since December 2008. Officials worried that “recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term.”
Fed officials have been signalling for months they expect to raise short-term rates before year-end. Early in the year many thought it could happen by June, but a first quarter slowdown stayed their hands. This summer a number of officials pointed to September, but expectations in financial markets for a move by then shifted down in August as the economic outlook shifted. Stock prices fell, the US dollar rose and yields on risky bonds increased in the face of uncertainties about China’s economy and other emerging markets.
Some Fed officials have described the September decision as a close call. The minutes don’t suggest there was intense disagreement with the decision to hold off on raising rates.
“After assessing the outlook for economic activity, the labour market, and inflation and weighing the uncertainties associated with the outlook, all but one member concluded that, although the US economy had strengthened and labour under-utilisation had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting,” the minutes said.
Thirteen of 17 Fed officials said in projections they expected to move this year. Ms Yellen emphasised in a speech after the meeting that she was among this group.
The Fed said the growth outlook and jobs performance are critical in their judgment about whether inflation is firming near 2 per cent and the time to move on rates has arrived. The Fed’s inflation forecast places great weight on slack in the economy. As growth picks up and unemployment falls, officials believe, slack diminishes and puts upward pressure on prices.
“Most members agreed that their confidence that inflation would move to the (Fed’s) inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labour market conditions improved further,” the minutes said. A few also said their confidence would rise if they saw wages picking up, though that wasn’t a precondition for an interest-rate increase.
“Other factors important to the committee’s assessment of the inflation outlook were the expectation that the influences of lower energy and commodity prices on headline inflation would abate, as had occurred in previous episodes, and that inflation expectations would remain stable.”
Though the Fed puts great weight on inflation and unemployment, some officials also are worried about excesses building in the financial system. Some worried that delaying rate increases could lead to an “undesired build-up” of financial imbalances that “would be costly to unwind and that eventually could have adverse consequences for economic growth.”
Wall Street Journal

• Oct 12 2015 at 7:58 AM 
   
  

US earnings 'recession' talk overblown

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[img=620x0]http://www.afr.com/content/dam/images/g/j/j/e/3/9/image.related.afrArticleLead.620x350.gk64lo.png/1444597133534.jpg[/img]American shares posted strong gains for the week but investors took a breather on Friday ahead of the US earnings season. AP
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by John Kehoe
Profit reporting season comes into focus for Wall Street this week and some analysts are talking about an "earnings recession".
Ordinarily, two straight quarters of negative earnings per share (EPS) growth would signal the United States economy is heading towards recession. But there are good reasons to believe "this time it's different".
Consensus estimates for the third quarter EPS for S&P 500 companies is for a 4 per cent year-on-year decline, the first back-to-back quarterly fall since 2009.
A strong US dollar, weakness in emerging market economies and the slump in oil prices in the three months to September 30 are the key headwinds.
But stripping out the wounded energy sector, where earnings are tipped to fall 60 per cent, earnings are forecast to grow 3 per cent, Bank of America Merrill Lynch notes.

Companies representing 85 per cent of the market capitalisation are due to report financial results between October 12 and November 6.
Company management are very deft at managing down expectations heading into reporting season. Extraordinarily, earnings per share for the S&P 500 have exceeded estimates in each of the last 25 quarters, Barclays' chief US equity strategist Jonathan Glionna says.
It's a glaring statistic and makes you wonder whether the US Securities and Exchange Commission needs to scrutinise companies hosing down expectations in a bid to get a share price bounce on profit reporting day.
"We believe the routine beating of expectations is one of the key reasons why the beginning of earnings season is often a period of positive returns for the S&P 500," Glionna notes.


GUIDANCE WILL BE UNDER A MICROSCOPE
The uptick began last week, when the S&P 500 gained 3.3 per cent, its best performance since December.
The 9 per cent jump in the US oil price underpinned a jump of almost 8 per cent in energy stocks.
Beyond the backward looking profit numbers, investors will closely scrutinise guidance by management in the coming weeks.

The outlook is incredibly uncertain, given the slowdown in the world economy, ambiguity about the path for US interest rates and see-sawing commodity prices.
"Commentary is likely to remain cautious, and earnings season may thus do little to inspire confidence among investors," Bank of America Merrill Lynch says.
Given there are so many external macroeconomic factors at play, it's far from certain management will be able to enunciate a clear view of what lies ahead.
Events are somewhat out of their control.

The bottom line is ignore talk of an earnings recession, observe the performance of non-energy firms closely and mull over any outlook guidance by management.

It is not as clear-case, as most market players anticipated...

Fed divisions exposed as Tarullo says he doesn't back 2015 hike
14 Oct 2015 07:17
[WASHINGTON] Federal Reserve policy divisions were exposed Tuesday as Governor Daniel Tarullo argued interest rates should stay on hold while documents showed most regional Fed directors sought higher borrowing costs, challenging Chair Janet Yellen to maintain consensus.
...
BLOOMBERG

Source: Business Times Breaking News

• OPINION
  

Zero rates make life tough for US banking giants

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NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/h/p/r/3/n/image.related.afrArticleLead.620x350.gkaibc.png/1444946069050.jpg[/img]Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group, knows only too well that the global economic recovery is faltering. Daniel Acker
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by Karen Maley
US investors may be happy that the chances of a US rate hike this year are diminishing by the day, but their cheer is not shared by the bosses of the country's big banks.
Indeed, the third-quarterly profits just released by major US banks show just how tough market conditions have become now that all the world's major central banks have pinned interest rates close to zero.
Overnight Goldman Sachs reported that its net income for the quarter was $US1.43 billion, a slide of 36 per cent from a year earlier. The investment bank's net revenue was $US6.86 billion, falling below the $US7 billion level for the first time in two years.
The difficulty of making money in extremely uncertain market conditions was reflected in the one-third drop in the investment bank's revenue from its huge fixed-income, currencies and commodities (FICC) trading division.

Growing worries about the health of the global economy also made life tougher for the investment bank. "We experienced lower levels of activity and declining asset prices during the quarter, reflecting renewed concerns about global economic growth", Goldman boss Lloyd Blankfein said in a statement.
In contrast Goldman, which is Wall Street's leading adviser on mergers and acquisitions, enjoyed a 36 per cent jump in revenue from traditional investment banking activities as US corporate activity has hotted up.
So far, Blankfein has resisted embarking on large-scale cuts, arguing that activity from trading clients will bounce back. All the same, Goldman's drop in FICC trading revenues was worse than that of JP Morgan Chase (down 23 per cent) and Bank of America (down 11 per cent).
Investors had been bracing for disappointing profits from the banks as their net interest rate margins have been squeezed by a prolonged period of near-zero interest rates and the sector has the faced growing regulatory pressures. But the results reported by the big banks have proved worse than expected.


Earlier this week, JPMorgan Chase, the biggest US bank by assets, missed market estimates when it reported net income of $US6.8 billion in the third quarter, and unnerved analysts with a 7 per cent dip in revenue.
To offset this slide in revenues JP Morgan Chase promised to step up its efforts to cut expenses, promising to deliver a further $500 million in savings, on top of its scheduled $1 billion cost-cutting program for 2015.
But investors have been dismayed by signs of increasing pressure on revenues of other major US banks. Bank of America saw its net revenues drop about 2 per cent. Wells Fargo, which is the world's biggest bank in terms of market capitalisation, reported a 3 per cent lift in revenues, but this was lifted by the bank's acquisition of $9 billion of real estate loans from GE capital.
The squeeze on bank revenues is partly the result of almost seven years of near-zero US interest rates, which means that banks are writing new loans at much lower rates than their older loans, which are now rolling off.

Another factor is the fragile US economic recovery, which has translated into sluggish demand for home loans and credit cards in the banks' retail operations.
Tougher regulation has also played a role, reducing margins in formerly highly profitable activities such as trading and underwriting.
The squeeze on revenues leaves banks with a difficult choice – either they have to prepare their investors to expect lower returns, or intensify their efforts to slash costs and exit unprofitable business activities. But this will result in even more job losses in the banking sector, which will do little to bolster US consumer confidence.
Bank of America has already closed a net 206 branches over the past year, while JPMorgan Chase has reduced the headcount in its consumer division by about 10,000 so far this year.

As they go about pruning their workforces, US bank bosses will be keeping a close eye out for signs that the US central bank might finally provide some relief by lifting US interest rates.
But it could be a long wait. The chances of a US interest rate rise this year are rapidly decreasing amid growing evidence that the US economic recovery is faltering.
That's something that US bank bosses have been aware of for quite some time.