25-03-2015, 01:33 PM
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28-03-2015, 02:18 PM
Yellen Sees Gradual Pace of Rate Rises Starting This Year
http://www.bloomberg.com/news/articles/2...-this-year
http://www.bloomberg.com/news/articles/2...-this-year
06-04-2015, 10:23 AM
Drop in US hirings puts June rate rise in doubt
BEN LEUBSDORF THE WALL STREET JOURNAL APRIL 06, 2015 12:00AM
Drop in hirings puts rate rise in doubt
Growth in non-farm payrolls slowed in March to 126,000, the weakest hiring in 15 months. Picture: AP Source: AP
A sharp deceleration in hiring last month ended a year-long stretch of heady job creation in the US, stirring concern about broader economic growth amid mounting evidence of a slowdown.
Closely watched gauges of consumer spending, capital investment and manufacturing output have all slumped in recent months. A strong US dollar has restrained exports and could continue to drag down broader growth, many economists say.
The labour market has appeared more resilient, but the weekend report from the Labour Department showed growth in non-farm payrolls slowed in March to a seasonally adjusted 126,000, the weakest hiring in 15 months. The unemployment rate held steady at 5.5 per cent.
With hiring estimates for January and February revised down, job growth averaged 197,000 a month during the first quarter, down from an average of 324,000 in the final three months of 2014 and eerily similar to hiring in the first quarter of last year, when economic activity contracted for the first time since 2011.
“The recovery’s not as robust as was assumed,” said Megan Greene, chief economist at John Hancock Asset Management. “The jobs data is finally catching up to the rest of the indicators.”
The sudden downturn in hiring could complicate the Federal Reserve’s plans on when to raise short-term interest rates. Central bank officials have said continued improvement in labour markets would be a key factor in their thinking on rates, and so the labour report reduces the chances of a rate increase at the Fed’s June policy meeting.
However, the thinking could change as more data — including two more jobs reports — come in over the next few months.
Much of the recent sluggishness may be chalked up to bitter cold temperatures and snowstorms across much of the eastern US, but the signs of weakness don’t end there. The spending boost from cheaper petrol appears to have faded. Low oil prices are sparking oilfield lay-offs.
Economists now think growth in gross domestic product, the broadest measure of goods and services produced across the economy, slowed sharply in early 2015 from a growth rate of 2.2 per cent in the fourth quarter and 5 per cent in the third quarter.
Forecaster Macroeconomic Advisers last week predicted growth at 1.2 per cent in the first quarter, while others put their forecasts still lower. The Commerce Department will release its first official reading late this month.
At the Fed, an improving labour market has raised expectations for higher interest rates despite the fact that US inflation has undershot the central bank’s 2 per cent annual target for nearly three years.
The Fed’s policymaking committee last month signalled the first rate increase could come as soon as June, if the labour market continues to improve and officials are “reasonably confident” that inflation will move back toward 2 per cent.
JPMorgan Chase chief US economist Michael Feroli said he now saw little chance that Fed officials would raise rates in June. “They really need to be impressed by the data to get moving in June, and this is not a good start for that,” said Mr Feroli, a former Fed economist.
BEN LEUBSDORF THE WALL STREET JOURNAL APRIL 06, 2015 12:00AM
Drop in hirings puts rate rise in doubt
Growth in non-farm payrolls slowed in March to 126,000, the weakest hiring in 15 months. Picture: AP Source: AP
A sharp deceleration in hiring last month ended a year-long stretch of heady job creation in the US, stirring concern about broader economic growth amid mounting evidence of a slowdown.
Closely watched gauges of consumer spending, capital investment and manufacturing output have all slumped in recent months. A strong US dollar has restrained exports and could continue to drag down broader growth, many economists say.
The labour market has appeared more resilient, but the weekend report from the Labour Department showed growth in non-farm payrolls slowed in March to a seasonally adjusted 126,000, the weakest hiring in 15 months. The unemployment rate held steady at 5.5 per cent.
With hiring estimates for January and February revised down, job growth averaged 197,000 a month during the first quarter, down from an average of 324,000 in the final three months of 2014 and eerily similar to hiring in the first quarter of last year, when economic activity contracted for the first time since 2011.
“The recovery’s not as robust as was assumed,” said Megan Greene, chief economist at John Hancock Asset Management. “The jobs data is finally catching up to the rest of the indicators.”
The sudden downturn in hiring could complicate the Federal Reserve’s plans on when to raise short-term interest rates. Central bank officials have said continued improvement in labour markets would be a key factor in their thinking on rates, and so the labour report reduces the chances of a rate increase at the Fed’s June policy meeting.
However, the thinking could change as more data — including two more jobs reports — come in over the next few months.
Much of the recent sluggishness may be chalked up to bitter cold temperatures and snowstorms across much of the eastern US, but the signs of weakness don’t end there. The spending boost from cheaper petrol appears to have faded. Low oil prices are sparking oilfield lay-offs.
Economists now think growth in gross domestic product, the broadest measure of goods and services produced across the economy, slowed sharply in early 2015 from a growth rate of 2.2 per cent in the fourth quarter and 5 per cent in the third quarter.
Forecaster Macroeconomic Advisers last week predicted growth at 1.2 per cent in the first quarter, while others put their forecasts still lower. The Commerce Department will release its first official reading late this month.
At the Fed, an improving labour market has raised expectations for higher interest rates despite the fact that US inflation has undershot the central bank’s 2 per cent annual target for nearly three years.
The Fed’s policymaking committee last month signalled the first rate increase could come as soon as June, if the labour market continues to improve and officials are “reasonably confident” that inflation will move back toward 2 per cent.
JPMorgan Chase chief US economist Michael Feroli said he now saw little chance that Fed officials would raise rates in June. “They really need to be impressed by the data to get moving in June, and this is not a good start for that,” said Mr Feroli, a former Fed economist.
06-04-2015, 10:25 AM
Jobs data makes even a September rate hike ‘iffy’
JUSTIN LAHART THE WALL STREET JOURNAL APRIL 06, 2015 12:00AM
Even a September hike ‘iffy’
A worker fixes the wiring above traffic lights in Long Beach, California, at the weekend. Source: AFP
The weekend jobs numbers made the Federal Reserve’s path over the next several months clearer. Just not in a good way.
The Labour Department reported that the economy added just 126,000 jobs in March, far fewer than the 247,000 economists were looking for and the smallest gain in more than a year.
Worse, downward revisions to January and February reduced America’s job count by 69,000. If there was any question that the Fed would pass up on raising rates at its June meeting, it has been resolved.
Indeed, amid signs that global economic weakness has begun to weigh on the US job market, even the September lift-off on rates that most economists have been forecasting is looking iffy.
The labour market’s weakness last month was concentrated in what are known as the goods-producing sectors: manufacturing, construction and mining and logging. These saw a loss of 13,000 jobs, marking the worst month since July 2013. Some of that may be attributable to the cold.
But the more worrisome exposure is to weakness abroad. Struggling economies overseas have helped send oil and other commodity prices lower and the dollar higher. Chances are the labour market will be able to handle these challenges. Low oil prices help America more than they hurt it and over time should add more jobs than they take away.
In the absence of the factors that weighed on it over the northern winter the economy should improve now in the spring. And that should give more impetus to hiring.
But the Fed will want to be sure. That is particularly the case when inflation is running well below its 2 per cent target. The big question now is whether the Fed will gain such confidence, and raise rates, by September. Fed funds futures contracts now put nearly even odds of it foregoing an increase at that meeting.
Even if a June rate rise is off the table, the market’s chronic state of uncertainty ahead of the Fed’s next move lingers. Whichever way the economic data breaks in the months ahead, somebody is going to get caught badly off-side.
JUSTIN LAHART THE WALL STREET JOURNAL APRIL 06, 2015 12:00AM
Even a September hike ‘iffy’
A worker fixes the wiring above traffic lights in Long Beach, California, at the weekend. Source: AFP
The weekend jobs numbers made the Federal Reserve’s path over the next several months clearer. Just not in a good way.
The Labour Department reported that the economy added just 126,000 jobs in March, far fewer than the 247,000 economists were looking for and the smallest gain in more than a year.
Worse, downward revisions to January and February reduced America’s job count by 69,000. If there was any question that the Fed would pass up on raising rates at its June meeting, it has been resolved.
Indeed, amid signs that global economic weakness has begun to weigh on the US job market, even the September lift-off on rates that most economists have been forecasting is looking iffy.
The labour market’s weakness last month was concentrated in what are known as the goods-producing sectors: manufacturing, construction and mining and logging. These saw a loss of 13,000 jobs, marking the worst month since July 2013. Some of that may be attributable to the cold.
But the more worrisome exposure is to weakness abroad. Struggling economies overseas have helped send oil and other commodity prices lower and the dollar higher. Chances are the labour market will be able to handle these challenges. Low oil prices help America more than they hurt it and over time should add more jobs than they take away.
In the absence of the factors that weighed on it over the northern winter the economy should improve now in the spring. And that should give more impetus to hiring.
But the Fed will want to be sure. That is particularly the case when inflation is running well below its 2 per cent target. The big question now is whether the Fed will gain such confidence, and raise rates, by September. Fed funds futures contracts now put nearly even odds of it foregoing an increase at that meeting.
Even if a June rate rise is off the table, the market’s chronic state of uncertainty ahead of the Fed’s next move lingers. Whichever way the economic data breaks in the months ahead, somebody is going to get caught badly off-side.
13-04-2015, 10:34 PM
Profit forecasts hint at earnings recession
864 words
13 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
You just haven’t earned it yet, baby . . . You must suffer and die for a longer time. – The Smiths
Earnings season is upon us. And possibly we will see the US slip into an earnings recession. As US companies come clean about the first quarter of this year, much is at stake.
Earnings forecasts for 2015 have taken a stunning dive so far this year. According to FactSet, forecast earnings for the S&P 500 in the first quarter have fallen 8.2 per cent since January 1, a dive that would normally happen only in a severe downturn. If profit estimates from groups such as Thomson Reuters and S&P Capital IQ are correct, the US will suffer year-on-year falls in earnings for both the first two quarters of this year. That is an ‘‘earnings recession’’.
Stripping out the effects of tax and cheap debt to look at just operating profits, Ned Davis Research shows that profits fell sharply in the fourth quarter of last year and are set to fall for the first two quarters of this, marking the biggest and most prolonged decline since the worst of the Great Recession in 2009.
There are many reasons to be cynical about earnings season. US quarterly reporting tilts investors and management towards an unhealthy short-termism. Companies talk down expectations to get a bump in their share price when they clear the low hurdle they set themselves.
The latest prediction for the S&P is that first-quarter earnings will reduce by about 3 per cent year on year, and this is reason to suspect that the profits ‘‘recession’’ could turn out to be a duller flat outcome.
But the reasons for the sudden write-down give cause for genuine concern. Two macro shifts in the past 12 months make earnings harder to predict and, for companies, easier to obfuscate. They also naturally stoke volatility.
First, the collapse in the oil price in 2014 muddied the waters. This has an immediate negative impact on companies that sell oil, and a slower positive impact on companies that benefit from cheaper oil.
Second, there is the strengthening of the dollar against all other currencies, notably the euro. That makes the foreign earnings of US companies look weaker in dollars while improving the US earnings of foreign multinationals.
A third factor, the Europe slowdown, followed by signs of green shoots in its economy, adds another optical distortion. In Europe expectations are heading for the sky, with profit growth of 13.5 per cent forecast for this year over last, according to S&P Capital IQ.
But much of this has to do with maths. Earnings for 2014, still dribbling out from European companies, look to show a disappointing 2.4 per cent annual gain; the recovery that did not happen last year is now expected to happen this year; so this year’s percentage increase (projected at 13.5 per cent by S&P Capital IQ) will be healthier because it started from a lower base. There is ample room for disappointment.
How will this refract through markets? European stocks, evidently, have ignored 2014’s disappointment and are keyed up for growth. US stocks have had little momentum this year but set records only a few weeks ago and are up for the year. This is startling, and driven by hopes that earnings will rebound sharply by the end of the year; the oil price will rise somewhat while the benefits of cheaper oil will help consumer companies.
If an earnings recession does happen, it might not be quite such bad news as it at first appears. Ned Davis Research points out that stocks rise more through such slow earnings growth periods than when earnings rise fast. Severe falls in earnings – as might happen this year – are an exception. But these have been driven by economic recessions (not on the US horizon) and falling revenues. Sales growth is sluggish but not negative (outside the energy sector).
If this seems counterintuitive, put it in the context of the interest rate cycle. When the private sector is booming, rates tend to be rising, and this crimps the multiples it makes sense to pay for stocks. If profits this year are as bad as feared, there is every chance that the Fed will postpone rate rises until next year, which would be good for stocks.
There is one fly in this ointment. Slow earnings growth does little damage to share prices because investors expect it and take it into account in earnings multiples. With low multiples in advance, stocks can continue to advance as earnings growth slows, or even falls. But price/earnings multiples are not cheap now. There are some arguments that they are not terribly expensive, but those arguments dissipate if earnings are actually to fall.
Put the macro confusion together with multiples that price stocks for perfection, and certainly not an earnings recession, and the risks are heavily tilted towards more volatility and a correction, even if lenient central banks limit the risk of a serious sell-off.
Fairfax Media Management Pty Limited
Document AFNR000020150412eb4d0002x
864 words
13 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
You just haven’t earned it yet, baby . . . You must suffer and die for a longer time. – The Smiths
Earnings season is upon us. And possibly we will see the US slip into an earnings recession. As US companies come clean about the first quarter of this year, much is at stake.
Earnings forecasts for 2015 have taken a stunning dive so far this year. According to FactSet, forecast earnings for the S&P 500 in the first quarter have fallen 8.2 per cent since January 1, a dive that would normally happen only in a severe downturn. If profit estimates from groups such as Thomson Reuters and S&P Capital IQ are correct, the US will suffer year-on-year falls in earnings for both the first two quarters of this year. That is an ‘‘earnings recession’’.
Stripping out the effects of tax and cheap debt to look at just operating profits, Ned Davis Research shows that profits fell sharply in the fourth quarter of last year and are set to fall for the first two quarters of this, marking the biggest and most prolonged decline since the worst of the Great Recession in 2009.
There are many reasons to be cynical about earnings season. US quarterly reporting tilts investors and management towards an unhealthy short-termism. Companies talk down expectations to get a bump in their share price when they clear the low hurdle they set themselves.
The latest prediction for the S&P is that first-quarter earnings will reduce by about 3 per cent year on year, and this is reason to suspect that the profits ‘‘recession’’ could turn out to be a duller flat outcome.
But the reasons for the sudden write-down give cause for genuine concern. Two macro shifts in the past 12 months make earnings harder to predict and, for companies, easier to obfuscate. They also naturally stoke volatility.
First, the collapse in the oil price in 2014 muddied the waters. This has an immediate negative impact on companies that sell oil, and a slower positive impact on companies that benefit from cheaper oil.
Second, there is the strengthening of the dollar against all other currencies, notably the euro. That makes the foreign earnings of US companies look weaker in dollars while improving the US earnings of foreign multinationals.
A third factor, the Europe slowdown, followed by signs of green shoots in its economy, adds another optical distortion. In Europe expectations are heading for the sky, with profit growth of 13.5 per cent forecast for this year over last, according to S&P Capital IQ.
But much of this has to do with maths. Earnings for 2014, still dribbling out from European companies, look to show a disappointing 2.4 per cent annual gain; the recovery that did not happen last year is now expected to happen this year; so this year’s percentage increase (projected at 13.5 per cent by S&P Capital IQ) will be healthier because it started from a lower base. There is ample room for disappointment.
How will this refract through markets? European stocks, evidently, have ignored 2014’s disappointment and are keyed up for growth. US stocks have had little momentum this year but set records only a few weeks ago and are up for the year. This is startling, and driven by hopes that earnings will rebound sharply by the end of the year; the oil price will rise somewhat while the benefits of cheaper oil will help consumer companies.
If an earnings recession does happen, it might not be quite such bad news as it at first appears. Ned Davis Research points out that stocks rise more through such slow earnings growth periods than when earnings rise fast. Severe falls in earnings – as might happen this year – are an exception. But these have been driven by economic recessions (not on the US horizon) and falling revenues. Sales growth is sluggish but not negative (outside the energy sector).
If this seems counterintuitive, put it in the context of the interest rate cycle. When the private sector is booming, rates tend to be rising, and this crimps the multiples it makes sense to pay for stocks. If profits this year are as bad as feared, there is every chance that the Fed will postpone rate rises until next year, which would be good for stocks.
There is one fly in this ointment. Slow earnings growth does little damage to share prices because investors expect it and take it into account in earnings multiples. With low multiples in advance, stocks can continue to advance as earnings growth slows, or even falls. But price/earnings multiples are not cheap now. There are some arguments that they are not terribly expensive, but those arguments dissipate if earnings are actually to fall.
Put the macro confusion together with multiples that price stocks for perfection, and certainly not an earnings recession, and the risks are heavily tilted towards more volatility and a correction, even if lenient central banks limit the risk of a serious sell-off.
Fairfax Media Management Pty Limited
Document AFNR000020150412eb4d0002x
18-04-2015, 05:02 PM
Fed rate hike could benefit economy
Jonathan Shapiro
1188 words
8 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Monetary policy US fund manager shifts into large financials.
Janet Yellen, chair of the US Federal Reserve, will raise interest rates. It will shake the financial markets and spark fears of a recession. But the first rate increase in almost a decade should be embraced as a good thing for the economy and investors if they hold the right stocks.
That is the view of Baltimore-based fund manager David Eiswert, of T-Rowe Price, who is convinced higher rates will break the disinflationary spell that has lulled US companies and households into believing that growth is dead and prices won't go up.
Eiswert says investors need to ask themselves three questions: Is the Fed going to raise rates, are asset prices going to be affected and will it cause an economic recession?
To the first question: Yes, it will raise rates. Yellen's job is to "remove excessive accommodation from the US economy". While rates could move lower in the short term, in the long run the only way is up.
The highest probability outcome is that they are higher. In six months who knows, but today is not the day to start Pimco - the well-known bond fund manager founded by Bill Gross in 1971.
"It's not the day to say, 'I'd like to start a fixed-income manager'," Eiswert, who runs a $US3.8 billion ($5 billion) Global Growth fund for T Rowe, says. The fund has returned 18.11 per cent over three years and 10.33 per cent over five years net of fees in US dollars, fund manager data shows.
Asset prices will also move if the Fed tightens monetary policy, most likely downwards. But the pain is likely to be felt in assets that have benefited from the search for yield in a low-rate world that has taken a view that rates will stay low. As for a pending recession, Eiswert says a hike could actually have the opposite impact and force companies and households to spend for fear of rising prices.
"When the Fed raises rates it potentially accelerates economic activity. The deflationary mindset turns to an inflationary mindset because the rate is the price of money those with expectations it will never rise suddenly act. That's the nature of inflation - you act today to avoid higher prices in the future," he says.
This is most evident among "millennials" who have delayed starting families and moving to the suburbs because of the financial crisis and the costs involved. But they're fed up with living in noisy apartments. Household formation has gone "parabolic" in the past year as more families eventually embrace the American Dream of home ownership. This, coupled with the prospect of rising rates, could have a powerful effect on the United States and, by extension, the global economy.
"When people believe the price of the house and the price of the money is going up, they act. If I told you a 30-year mortgage is 3.5 per cent you may not want to buy a house.
"But if I told you the rate would be 5 per cent in two years and prices are going to go up to 10 per cent in two years, you're going to buy a house!"
The deflationary mindset is more prevalent in the corporate sector, which has cut costs, reduced capacity, embarked on a deal-making frenzy and returned funds to income-hungry investors. But this very process eventually leads to inflation, as demand picks up and capacity is tightened. This is best demonstrated by the resurgent US airline sector, where profits and share prices have soared.
T-Rowe Price has a large position in American Airlines, one of the operators that has enjoyed surging profits and share prices as the industry cut costs and reduced capacity, but benefited from rising demand for air travel. Eventually the airline will be compelled to add capacity to increase revenue and will turn to airline manufacturers such as Boeing and Airbus, which will also have to invest to increase production. The very onset of a deflationary mindset leads to inflation, Eiswert says.
To prepare for a more normal world where interest rates are higher than their near-zero settings in the US, Eiswert says his fund has shifted into large financials and away from the safe dividend yielders that have benefited from the search for income.
"Consumer staples are the most at risk of a rising rate world where a lot of lazy capital is sitting to chase yield and safety. You don't want to call it a bubble and mania but there's been such a focus on searching out yield globally because there's been an acceptance of the new normal and the idea that the world is not going to grow as it used to," he says. The financial stocks he likes and owns in the portfolio are JP Morgan, Morgan Stanley, State Street, CME Group and Ameritrade, Royal Bank of Scotland in Britain and BBVA in Spain.
"[The cost of] regulation has peaked, volatility is coming back and the short end of the curve is going to increase," he says. CME, a monopoly exchange that operates bond-related derivatives, should get an earnings kick if rising rates lead to volatility in the bond market, while Ameritrade will earn higher interest on account balances should short-term interest rates rise.
While Dr Yellen has prepped financial markets for an eventual lift-off in US interest rates, she has tended to sprinkle her statements with dovish comments to appease the market that any increase will be dependent on the data and will be carefully considered.
The market is holding its bet the Federal Reserve will be reluctant to raise interest rates and poor jobs data added weight to a delayed increase in rates. On Friday, the US Labor Department said the economy created only 126,000 new jobs in March, the lowest monthly level since December 2013, and far below economists' expectations.
"They're not afraid of the impact of 25 basis points on the economy, but they are afraid of the behaviour of market participants who have been lulled into the yield trade," Eiswert says.
The extended period of low interest rates has slowly but surely convinced more investors that they will never rise and invited theories as to why the lower-for-longer world will persist.
One is economist Larry Summer's notion of secular stagnation, which can be broadly defined as a belief that economic growth will stall as the world's population ages and investment opportunities become scarcer, particularly in a capital light digital age.
"If there's one bubble the argument of secular stagnation is a bubble to me. I promise you we are not at the peak of human history. I promise you we haven't figured it all out," Eiswert says. He points to the advances in oncology, which have spurred a surge in biotech stocks such as Gilead Sciences, as one example of human ingenuity.
Fairfax Media Management Pty Limited
Document AFNR000020150407eb4800014
Jonathan Shapiro
1188 words
8 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Monetary policy US fund manager shifts into large financials.
Janet Yellen, chair of the US Federal Reserve, will raise interest rates. It will shake the financial markets and spark fears of a recession. But the first rate increase in almost a decade should be embraced as a good thing for the economy and investors if they hold the right stocks.
That is the view of Baltimore-based fund manager David Eiswert, of T-Rowe Price, who is convinced higher rates will break the disinflationary spell that has lulled US companies and households into believing that growth is dead and prices won't go up.
Eiswert says investors need to ask themselves three questions: Is the Fed going to raise rates, are asset prices going to be affected and will it cause an economic recession?
To the first question: Yes, it will raise rates. Yellen's job is to "remove excessive accommodation from the US economy". While rates could move lower in the short term, in the long run the only way is up.
The highest probability outcome is that they are higher. In six months who knows, but today is not the day to start Pimco - the well-known bond fund manager founded by Bill Gross in 1971.
"It's not the day to say, 'I'd like to start a fixed-income manager'," Eiswert, who runs a $US3.8 billion ($5 billion) Global Growth fund for T Rowe, says. The fund has returned 18.11 per cent over three years and 10.33 per cent over five years net of fees in US dollars, fund manager data shows.
Asset prices will also move if the Fed tightens monetary policy, most likely downwards. But the pain is likely to be felt in assets that have benefited from the search for yield in a low-rate world that has taken a view that rates will stay low. As for a pending recession, Eiswert says a hike could actually have the opposite impact and force companies and households to spend for fear of rising prices.
"When the Fed raises rates it potentially accelerates economic activity. The deflationary mindset turns to an inflationary mindset because the rate is the price of money those with expectations it will never rise suddenly act. That's the nature of inflation - you act today to avoid higher prices in the future," he says.
This is most evident among "millennials" who have delayed starting families and moving to the suburbs because of the financial crisis and the costs involved. But they're fed up with living in noisy apartments. Household formation has gone "parabolic" in the past year as more families eventually embrace the American Dream of home ownership. This, coupled with the prospect of rising rates, could have a powerful effect on the United States and, by extension, the global economy.
"When people believe the price of the house and the price of the money is going up, they act. If I told you a 30-year mortgage is 3.5 per cent you may not want to buy a house.
"But if I told you the rate would be 5 per cent in two years and prices are going to go up to 10 per cent in two years, you're going to buy a house!"
The deflationary mindset is more prevalent in the corporate sector, which has cut costs, reduced capacity, embarked on a deal-making frenzy and returned funds to income-hungry investors. But this very process eventually leads to inflation, as demand picks up and capacity is tightened. This is best demonstrated by the resurgent US airline sector, where profits and share prices have soared.
T-Rowe Price has a large position in American Airlines, one of the operators that has enjoyed surging profits and share prices as the industry cut costs and reduced capacity, but benefited from rising demand for air travel. Eventually the airline will be compelled to add capacity to increase revenue and will turn to airline manufacturers such as Boeing and Airbus, which will also have to invest to increase production. The very onset of a deflationary mindset leads to inflation, Eiswert says.
To prepare for a more normal world where interest rates are higher than their near-zero settings in the US, Eiswert says his fund has shifted into large financials and away from the safe dividend yielders that have benefited from the search for income.
"Consumer staples are the most at risk of a rising rate world where a lot of lazy capital is sitting to chase yield and safety. You don't want to call it a bubble and mania but there's been such a focus on searching out yield globally because there's been an acceptance of the new normal and the idea that the world is not going to grow as it used to," he says. The financial stocks he likes and owns in the portfolio are JP Morgan, Morgan Stanley, State Street, CME Group and Ameritrade, Royal Bank of Scotland in Britain and BBVA in Spain.
"[The cost of] regulation has peaked, volatility is coming back and the short end of the curve is going to increase," he says. CME, a monopoly exchange that operates bond-related derivatives, should get an earnings kick if rising rates lead to volatility in the bond market, while Ameritrade will earn higher interest on account balances should short-term interest rates rise.
While Dr Yellen has prepped financial markets for an eventual lift-off in US interest rates, she has tended to sprinkle her statements with dovish comments to appease the market that any increase will be dependent on the data and will be carefully considered.
The market is holding its bet the Federal Reserve will be reluctant to raise interest rates and poor jobs data added weight to a delayed increase in rates. On Friday, the US Labor Department said the economy created only 126,000 new jobs in March, the lowest monthly level since December 2013, and far below economists' expectations.
"They're not afraid of the impact of 25 basis points on the economy, but they are afraid of the behaviour of market participants who have been lulled into the yield trade," Eiswert says.
The extended period of low interest rates has slowly but surely convinced more investors that they will never rise and invited theories as to why the lower-for-longer world will persist.
One is economist Larry Summer's notion of secular stagnation, which can be broadly defined as a belief that economic growth will stall as the world's population ages and investment opportunities become scarcer, particularly in a capital light digital age.
"If there's one bubble the argument of secular stagnation is a bubble to me. I promise you we are not at the peak of human history. I promise you we haven't figured it all out," Eiswert says. He points to the advances in oncology, which have spurred a surge in biotech stocks such as Gilead Sciences, as one example of human ingenuity.
Fairfax Media Management Pty Limited
Document AFNR000020150407eb4800014
29-04-2015, 11:13 PM
With US GDP grow only just 0.2%. I think Fed is between a wall and hard place. I think they may not rise rate for this year after all.
And if they so decide, then US dollar will drop and that may cause all commodities to rise, especially oil.
If one is confident that this will come about, then some solid counter like First Resource and Bumitama Agri may be good stock to be vested in.
And if they so decide, then US dollar will drop and that may cause all commodities to rise, especially oil.
If one is confident that this will come about, then some solid counter like First Resource and Bumitama Agri may be good stock to be vested in.
30-04-2015, 07:55 PM
US Fed leaves door ajar on rates
DANIEL PALMER BUSINESS SPECTATOR APRIL 30, 2015 6:40AM
US Fed chair Janet Yellen and her committee have left open the time frame for a rise in US interest rates. Source: AP
The US Federal Reserve has offered little fresh insight into the timing of its first rate hike, again noting any moves will be dependent on further signs of positive momentum in the labour market and indications inflation is moving back toward the central bank’s two per cent target.
The Fed’s closely-watched statement out of a two-day policy meeting did, however, suggest the central bank was not concerned by the weak first quarter GDP print released to the market overnight (AEST) with the Fed confident of “moderate growth” for the remainder of the year.
“Information received since the Federal Open Market Committee (FOMC) met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors,” the statement read.
“Although growth in output and employment slowed during the first quarter, the committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labour market indicators continuing to move toward levels the committee judges consistent with its dual mandate.”
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MOREWall Street slips on weak GDP
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As it has maintained for many months, the Fed said risks to the US economy remained “nearly balanced”, with low inflation to persist in the near-term before rising “gradually toward two per cent over the medium-term.”
Unlike recent statements the Fed offered very little in the way of forward guidance, leaving the door ajar for a rate hike at any of its meetings for the remainder of the year should the labour market and inflation data suggest it is warranted.
“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its two per cent objective over the medium term,” the statement advised.
“When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two per cent.”
It was the first time the Fed had not categorically ruled out a rate hike at its next meeting since the financial crisis, though most analysts are now expecting the central bank to hold fire until later in the year given recent mixed data.
There were no dissenting votes for the statement among the 10-person, policy-setting FOMC.
The US central bank has held its benchmark Fed funds rate at the zero level since the end of 2008, keeping monetary policy extraordinarily loose to support recovery from the recession.
The prospect of higher US interest rates has stirred waves in global markets for nearly two years, sending the US dollar sharply higher and sparking capital outflows from weaker economies.
In its statement, the committee highlighted some of the factors that had caused the economy to slow to just a 0.2 per cent annual growth pace in the first quarter: job gains moderated, business fixed investment and household spending slowed, and exports declined.
But it also noted a strength that could underpin a rebound in the second quarter.
“Households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high,” it said.
The FOMC said it expected the jobs market would continue to improve, after a poor showing in March broke a 12-month string of strong performances that added 3.4 million jobs to the US economy.
Business Spectator, AFP
DANIEL PALMER BUSINESS SPECTATOR APRIL 30, 2015 6:40AM
US Fed chair Janet Yellen and her committee have left open the time frame for a rise in US interest rates. Source: AP
The US Federal Reserve has offered little fresh insight into the timing of its first rate hike, again noting any moves will be dependent on further signs of positive momentum in the labour market and indications inflation is moving back toward the central bank’s two per cent target.
The Fed’s closely-watched statement out of a two-day policy meeting did, however, suggest the central bank was not concerned by the weak first quarter GDP print released to the market overnight (AEST) with the Fed confident of “moderate growth” for the remainder of the year.
“Information received since the Federal Open Market Committee (FOMC) met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors,” the statement read.
“Although growth in output and employment slowed during the first quarter, the committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labour market indicators continuing to move toward levels the committee judges consistent with its dual mandate.”
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MOREWall Street slips on weak GDP
End of sidebar. Return to start of sidebar.
As it has maintained for many months, the Fed said risks to the US economy remained “nearly balanced”, with low inflation to persist in the near-term before rising “gradually toward two per cent over the medium-term.”
Unlike recent statements the Fed offered very little in the way of forward guidance, leaving the door ajar for a rate hike at any of its meetings for the remainder of the year should the labour market and inflation data suggest it is warranted.
“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its two per cent objective over the medium term,” the statement advised.
“When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two per cent.”
It was the first time the Fed had not categorically ruled out a rate hike at its next meeting since the financial crisis, though most analysts are now expecting the central bank to hold fire until later in the year given recent mixed data.
There were no dissenting votes for the statement among the 10-person, policy-setting FOMC.
The US central bank has held its benchmark Fed funds rate at the zero level since the end of 2008, keeping monetary policy extraordinarily loose to support recovery from the recession.
The prospect of higher US interest rates has stirred waves in global markets for nearly two years, sending the US dollar sharply higher and sparking capital outflows from weaker economies.
In its statement, the committee highlighted some of the factors that had caused the economy to slow to just a 0.2 per cent annual growth pace in the first quarter: job gains moderated, business fixed investment and household spending slowed, and exports declined.
But it also noted a strength that could underpin a rebound in the second quarter.
“Households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high,” it said.
The FOMC said it expected the jobs market would continue to improve, after a poor showing in March broke a 12-month string of strong performances that added 3.4 million jobs to the US economy.
Business Spectator, AFP
05-06-2015, 08:29 AM
IMF urges US Fed to hold off on rate rise
IAN TALLEY DOW JONES JUNE 05, 2015 8:17AM
IMF chief Christine Lagarde: the fund has pressed the US Fed to defer a rate rise. Source: AFP
The International Monetary Fund Thursday has slashed its forecasts for US economic growth, calling for the Federal Reserve to hold off its first rate increase in nearly a decade until 2016.
In its annual review of the US economy, the IMF said a series of negative shocks, including a strong dollar and bad weather, had sapped momentum for job creation and expansion, forcing the fund to downgrade its growth expectations to 2.5 per cent for the year. Its last estimate in April was for a 3.1 per cent expansion.
The West Coast port strike and the collapse in oil sector investment amid plummeting energy prices also dragged on growth in the first quarter.
Barring upside surprises to growth and inflation, the fund said the weaker outlook means the Fed should defer its rate increase until the first half of 2016.
Long-term unemployment and high levels of part-time work point to continued slack in the labour market, with wage data showing only tepid growth.
The US dollar, which has surged against other major currencies in the past year as the US economy strengthened and other central banks revved up their easy-money policies, is damping growth and job creation. The fund said the currency is already “moderately overvalued” and further marked appreciation of the dollar would be harmful to the US economy.
Given the “significant uncertainty around inflation prospects, the degree of slack and the neutral policy rate, there is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation,” the fund said.
The IMF’s call for a deferred rate lift-off comes despite warning at the same time that risks are building in the financial system, notably in the insurance and money markets. Amid the prolonged period of ultralow rates, investors are pouring their cash into riskier assets in the search for higher returns.
But the IMF believes weak growth outweighs the financial risks posed by a prolonged ultralow rate environment.
Still, the fund outlined a host of recommendations to strengthen oversight of the financial system. In particular, the fund took the Financial Stability Oversight Committee to task, saying it was “critical” for the panel to bolster its management of risks.
Regardless of the when the Fed raises rates, the IMF warned that the increase could trigger “significant and abrupt rebalancing of international portfolios with market volatility and financial stability.” Inflation could also rise faster than expected, potentially provoking a sudden shift upward in borrowing costs.
“In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labour markets, and inflation outcomes” around the world, the IMF said. “Spillovers to economies with close trade and financial linkages could be substantial.”
The IMF also once again criticised what it called “policy dysfunction” over the federal budget. The inability of Congress and the White House to agree on a budget is fostering market uncertainty that is damaging to the U.S. economy, the fund said, especially given the potential for more government shutdowns. Public finances, the IMF said, remain on an unsustainable path.
Dow Jones
IAN TALLEY DOW JONES JUNE 05, 2015 8:17AM
IMF chief Christine Lagarde: the fund has pressed the US Fed to defer a rate rise. Source: AFP
The International Monetary Fund Thursday has slashed its forecasts for US economic growth, calling for the Federal Reserve to hold off its first rate increase in nearly a decade until 2016.
In its annual review of the US economy, the IMF said a series of negative shocks, including a strong dollar and bad weather, had sapped momentum for job creation and expansion, forcing the fund to downgrade its growth expectations to 2.5 per cent for the year. Its last estimate in April was for a 3.1 per cent expansion.
The West Coast port strike and the collapse in oil sector investment amid plummeting energy prices also dragged on growth in the first quarter.
Barring upside surprises to growth and inflation, the fund said the weaker outlook means the Fed should defer its rate increase until the first half of 2016.
Long-term unemployment and high levels of part-time work point to continued slack in the labour market, with wage data showing only tepid growth.
The US dollar, which has surged against other major currencies in the past year as the US economy strengthened and other central banks revved up their easy-money policies, is damping growth and job creation. The fund said the currency is already “moderately overvalued” and further marked appreciation of the dollar would be harmful to the US economy.
Given the “significant uncertainty around inflation prospects, the degree of slack and the neutral policy rate, there is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation,” the fund said.
The IMF’s call for a deferred rate lift-off comes despite warning at the same time that risks are building in the financial system, notably in the insurance and money markets. Amid the prolonged period of ultralow rates, investors are pouring their cash into riskier assets in the search for higher returns.
But the IMF believes weak growth outweighs the financial risks posed by a prolonged ultralow rate environment.
Still, the fund outlined a host of recommendations to strengthen oversight of the financial system. In particular, the fund took the Financial Stability Oversight Committee to task, saying it was “critical” for the panel to bolster its management of risks.
Regardless of the when the Fed raises rates, the IMF warned that the increase could trigger “significant and abrupt rebalancing of international portfolios with market volatility and financial stability.” Inflation could also rise faster than expected, potentially provoking a sudden shift upward in borrowing costs.
“In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labour markets, and inflation outcomes” around the world, the IMF said. “Spillovers to economies with close trade and financial linkages could be substantial.”
The IMF also once again criticised what it called “policy dysfunction” over the federal budget. The inability of Congress and the White House to agree on a budget is fostering market uncertainty that is damaging to the U.S. economy, the fund said, especially given the potential for more government shutdowns. Public finances, the IMF said, remain on an unsustainable path.
Dow Jones
18-06-2015, 07:18 AM
C Bankers around the world have been delicately managing the fragile world economies that have been supported by various forms of asset bubbles in hope that wealth effect will translate into productivity growth and hence until participants of asset bubbles and potentially new blood let the guards down, asset markets will continued to bubble before the eventual burst...
http://www.cnbc.com/id/102766785
Fed leaves interest rates unchanged
Jeff Cox | @JeffCoxCNBCcom
4 Hours Ago
CNBC.com
Keeping a tight lid on its future intentions, the Federal Reserve on Wednesday held interest rates steady at zero and provided only faint clues about when the first hike in nine years might occur.
Adhering to market expectations, the Fed's Open Market Committee voted essentially to maintain the status quo that has prevailed since the U.S. central bank first went to zero rates in late-2008.
FOMC members deemed economic activity "expanding moderately" with various sectors seeing some activity. The language, though, was tempered and the various indicators the Fed uses to tip its hand on policy showed little movement. Economic estimates from Fed officials showed a considerably lower expectation for growth this year.
Market participants were looking toward the rest of the committee's report, which included economic projections and the so-called dot plot that diagrams individual members' expectations for the future path of rate hikes. The graph showed a wide swath of views, with little consensus other than a rate hike is likely at some point this year.
"There is consensus emerging that something should happen this year. That will certainly focus all of our attention on September. The debate is not whether do to something, but rather how much," said Carl Tannenbaum, chief economist for Northern Trust. "The news today offers quite a lot to think about."
Traders initially took the remarks in a dovish sense, with the Dow industrials turning mildly positive after being down 25 points or so prior to the release. Bond yields edged lower, with the 10-year Treasury note trading around 2.35 percent.
Parsing through the projections and the dot plot showed a Fed not ready to hike yet, but ready to pull the trigger over the next couple of years.
The Fed wants to "keep rates lower for longer, but when it comes time to hike, hike faster. Keep rates low, but allow inflation pressures to build. Before they get out of hand, hike rates faster to stop any inflation," said Jim Caron, portfolio manager with global fixed income at Morgan Stanley Investment Management. "What's really interesting is we're really just moving to optimal control on the path of Fed funds, which is lower for longer but when you hike you hike a little faster."
The Fed probably will hike in September and again in December, said Phil Orlando, chief equity strategist and portfolio manager at Federated Investors.
"A lot of investors are. Certainly the bond market is" expecting a rate hike, Orlando said. "That'w one of the reasons we saw 'taper tantrum' 2.0 over the last month or two...That was the realization that the economic data was getting sufficiently strong that the Fed was going to give serious thought to September."
The FOMC move comes as unemployment continues to drop but inflation shows almost no signs of getting to the Fed's target rate of 2 percent. The jobless rate has fallen to 5.5 percent but most inflation measures are moored in the 1 percent to 2 percent range, with low wage pressures, energy prices well below their year-ago levels and the gross domestic product in check.
Traders for months had been expecting the Fed to move at the June meeting. Now, the likelihood is for September at the earliest, with Chicago Mercantile Exchange trading indicating a higher probability in December.
Janet Yellen, Chair of the Federal Reserve.
Scott Eisen | Bloomberg | Getty Images
Janet Yellen, Chair of the Federal Reserve.
"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term," the statement said in language that has become common to Fed statements.
The economy thus far has fallen well short of 3 percent growth expectations. GDP actually contracted 0.7 percent in the first quarter and, according to the Atlanta Fed, is likely to rise only about 1.9 percent in the second quarter.
That's created a dilemma for the Fed, which would like to normalize policy but fears disrupting a still-fragile recovery.
Economic estimates from Fed officials turned more pessimistic in the short term and a shade more optimistic in the longer term than the last estimates in March. GDP in 2015 is expected to fall in the 1.8 percent to 2.0 percent range, down from 2.3 percent to 2.7 percent.
Inflation expectations were little changed, with growth still expected to fall in the 0.6 percent to 0.8 percent range for 2015.
Jeff Cox
Finance Editor
http://www.cnbc.com/id/102766785
Fed leaves interest rates unchanged
Jeff Cox | @JeffCoxCNBCcom
4 Hours Ago
CNBC.com
Keeping a tight lid on its future intentions, the Federal Reserve on Wednesday held interest rates steady at zero and provided only faint clues about when the first hike in nine years might occur.
Adhering to market expectations, the Fed's Open Market Committee voted essentially to maintain the status quo that has prevailed since the U.S. central bank first went to zero rates in late-2008.
FOMC members deemed economic activity "expanding moderately" with various sectors seeing some activity. The language, though, was tempered and the various indicators the Fed uses to tip its hand on policy showed little movement. Economic estimates from Fed officials showed a considerably lower expectation for growth this year.
Market participants were looking toward the rest of the committee's report, which included economic projections and the so-called dot plot that diagrams individual members' expectations for the future path of rate hikes. The graph showed a wide swath of views, with little consensus other than a rate hike is likely at some point this year.
"There is consensus emerging that something should happen this year. That will certainly focus all of our attention on September. The debate is not whether do to something, but rather how much," said Carl Tannenbaum, chief economist for Northern Trust. "The news today offers quite a lot to think about."
Traders initially took the remarks in a dovish sense, with the Dow industrials turning mildly positive after being down 25 points or so prior to the release. Bond yields edged lower, with the 10-year Treasury note trading around 2.35 percent.
Parsing through the projections and the dot plot showed a Fed not ready to hike yet, but ready to pull the trigger over the next couple of years.
The Fed wants to "keep rates lower for longer, but when it comes time to hike, hike faster. Keep rates low, but allow inflation pressures to build. Before they get out of hand, hike rates faster to stop any inflation," said Jim Caron, portfolio manager with global fixed income at Morgan Stanley Investment Management. "What's really interesting is we're really just moving to optimal control on the path of Fed funds, which is lower for longer but when you hike you hike a little faster."
The Fed probably will hike in September and again in December, said Phil Orlando, chief equity strategist and portfolio manager at Federated Investors.
"A lot of investors are. Certainly the bond market is" expecting a rate hike, Orlando said. "That'w one of the reasons we saw 'taper tantrum' 2.0 over the last month or two...That was the realization that the economic data was getting sufficiently strong that the Fed was going to give serious thought to September."
The FOMC move comes as unemployment continues to drop but inflation shows almost no signs of getting to the Fed's target rate of 2 percent. The jobless rate has fallen to 5.5 percent but most inflation measures are moored in the 1 percent to 2 percent range, with low wage pressures, energy prices well below their year-ago levels and the gross domestic product in check.
Traders for months had been expecting the Fed to move at the June meeting. Now, the likelihood is for September at the earliest, with Chicago Mercantile Exchange trading indicating a higher probability in December.
Janet Yellen, Chair of the Federal Reserve.
Scott Eisen | Bloomberg | Getty Images
Janet Yellen, Chair of the Federal Reserve.
"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term," the statement said in language that has become common to Fed statements.
The economy thus far has fallen well short of 3 percent growth expectations. GDP actually contracted 0.7 percent in the first quarter and, according to the Atlanta Fed, is likely to rise only about 1.9 percent in the second quarter.
That's created a dilemma for the Fed, which would like to normalize policy but fears disrupting a still-fragile recovery.
Economic estimates from Fed officials turned more pessimistic in the short term and a shade more optimistic in the longer term than the last estimates in March. GDP in 2015 is expected to fall in the 1.8 percent to 2.0 percent range, down from 2.3 percent to 2.7 percent.
Inflation expectations were little changed, with growth still expected to fall in the 0.6 percent to 0.8 percent range for 2015.
Jeff Cox
Finance Editor