The mid-day, market-moving announcement from FBI Director Comey resulted in the selloff of the DOLLAR, EQUITIES and RALLIES IN PRECIOUS METALS just after the market had enjoyed the better-than-expected first look at the third quarter GDP. I will try to make sense of both releases from a market stand point and in an APOLITICAL format.
Posts Tagged ‘GDP’
Last week New York Fed President Bill Dudley opined that the economy looks great but is less compelling in regards to raising interest rates, while the Fed’s Vice Chairman insisted that we only want to do things right. There were also other Fed Presidents offering their thoughts and the markets became more confused. Each FOMC member seems to analyze the data and come to a different conclusion about the timing of a move to raises interest rates. Minneapolis Fed President Kocherlakota went from being considered a hawk two years ago when he proposed an initial target of 6.5% unemployment. Now he has moved his target ever lower and would prefer to wait until the economy runs a “little hot.”
The talking heads in the financial media have a great deal to answer in regards to yesterday’s release of the San Francisco Fed’s Economic Letter by Rudebusch, Wilson and Mahedy in which the three researchers said: “We find that a second round of seasonal adjustment implies that real GDP growth so far this year appears to have been substantially stronger than the BEA [Bureau of Economic Analysis] initially reported.”
The Bank of England’s chief-economist had the line of the month in his response to the disinflationary forces confronting Europe and the U.K. It seems that the G-20 did yield much more discussion about Europe’s economic malaise than was revealed in the communique. BOE Governor Mark Carney was warning of stagnant Europe being a drag on the global economy and impacting British growth. Even the economically challenged British Prime Minister David Cameron warned of flashing “red lights” on his economic dashboard. The last inflation data from the BOE revealed that inflation has fallen below its target and the lack of growth in its largest trading partner, the EU, threaten to push inflation lower than previously expected.
Tomorrow is a big day for disseminating information with market-moving potential. The market is bored with war, pestilence and famine so it must be FED pronouncements and GDP data that can provide a volatility boost. The markets did twitch today as the European Union and the U.S. both upgraded the sanctions against Putin’s Russia. It will be very difficult for Russian banks and large energy consortiums to raise dollar- and euro-based capital. Even with the advent of new and improved sanctions the global equity markets barely moved, especially as corporate earnings in the U.S. continued its string of “beats.” The counter to the continued strength of the equity markets is the behavior of the global debt markets as European sovereigns from Spain to Germany have reached record low yields. The U.S. yield curves continue to flatten as investors continue purchasing 10- and 30-year debt driving long-term yields lower. Again, I will state that while the curves are flattening the 2/10 U.S. curve is not historically flat.
In today’s testimony to the Joint Economic Committee, Chair Yellen voiced concerns about the recent softness in the housing recovery. Her concern should be measured from two perspectives: One, the failure of wages to keep pace with returns on capital, or, as it is fashionable to say, R>G (the new rage inspired by Thoma Piketty). Financial markets have generated far more gains than GDP resulting in the middle-income groups not generating enough income to ignite home purchases. When Yellen worries about housing she is alluding to wage growth, especially as bank regulations have made it more difficult for buyers to secure loans. Two, last year the airwaves were filled with real estate agents raving about how the supply of homes was diminishing and therefore prices had to go higher. The problem with the rosy view from the Zillow crowd is that much of the demand was generated from foreign buyers with cash and large hedge funds and private equity groups buying large packages of distressed properties.
I am going to take a well-deserved hiatus but I wanted to list some “quick hitters” on the issues facing the markets in the coming weeks. The Yellen testimony has been digested and regurgitated (ad nauseam) and the bottom line is Chairwoman Yellen is singing from the same hymnal as her predecessor. The stock market investors/traders are comfortable with a known known and as readers of NOTES are well aware markets appreciate as much certainty as possible. BUT I WARN EQUITY BULLS WHO BLINDLY FOLLOW THE FED LIQUIDITY MODEL: Janet Yellen is a labor economist of Keynesian predilections.
It’s all good, so say the pundits. The tapering discussions have now moved to the issue of FORWARD GUIDANCE as Chairman Bernanke has maintained that at the zero bound interest rate FG may have more influence on rates than quantitative easing. For the Nth time, the FED is at a fork in the road and doesn’t know which path to take. A continuously steepening YIELD CURVE is an indication that the market is signaling its discomfort with the Fed. The rise in the longer end of the curve is causing the Fed a great deal of concern because their model seems to say that continued pressure on the short end will act to keep long rates low (unless, of course, the market is questioning the Fed’s credibility and rolling out of BONDS and into the equities). A key question for the FED: Are equity markets a better long-term investment (hedge) against the success of Fed policies?
It has been a very quiet weekend for financial market-moving news. Egypt and Syria brought nothing positive and even the European press was quiet. Reuters reported that the Spanish recession is deemed to be over but that is a highly debatable issue. The market is waiting to see if China makes its 7.7% GDP number, though why the market cares about massaged data is beyond my comprehension. Chinese Finance Minister Lou Jiwei said in Washington July 11 that the Chinese GDP may show growth below 7%. The official Chinese news agency walked back that number and claimed that the finance minister misspoke, probably due to travel fatigue. The consensus is for 7.7% so let’s see what the Chinese statistics delivers.