Global Tumult Gives Fed Some Pause on Rates Worries about global turbulence and soft spots in the U.S. economy weighed on Federal Reserve officials when they gathered in June, trepidations that could cause them to wait longer before raising interest rates
Several Fed officials have said publicly since the June meeting that a first interest-rate increase in nearly a decade could be warranted as early as September. But minutes of the June 16-17 gathering, released Wednesday, showed their underlying unease about taking that big step. (…)
Among the Fed’s worries, the minutes noted, were “uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies.” They also expressed concern about the slow pace of U.S. consumer spending. (…)
“Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States.” (…)
“I visited China recently, and I arrived fully cognizant of the concerns people highlight—slower growth, the unsustainability of the current export-driven model, debt buildup, bubbles in the equity and housing markets, the risk of falling investment, and the overall international implications of those risks,” John Williams, president of the Federal Reserve Bank of San Francisco, said in a speech Wednesday. “But I have to say that, after talking to officials and academics there, I was a lot less concerned about China’s near-term economic outlook on my return flight than I was heading over.” (…)
“Until I have more confidence that inflation will be moving back to 2%, I’ll continue to be in wait-and-see mode,” Mr. Williams said Wednesday.
Wait, wait! In the same WSJ, referring to the same speech:
“Policy is data dependent,” Mr. Williams said. But given the positive outlook for the U.S., “I still believe this will be the year for liftoff, and I still believe that waiting too long to raise rates poses its own risks,” he said.
The official added that the easiest path is for the Fed to move rates up off near- zero levels before inflation goes over the central bank’s 2% price target, saying “I see a safer course in starting sooner and proceeding more gradually” with rate rises. (…)
He said “our employment goal is in sight” and he expects the jobless rate to edge down from its current 5.3% level to around 5% by the close of 2015, moving even lower next year. He said wage gains are a sign the job market is “nearly healed.”
Mr. Williams also said inflation, which has fallen short of the Fed’s 2% target for three years, is likely to tick higher and hit desired levels by the end of next year. But he added he’d like to see confirmation inflation is moving up before shifting the stance of Fed interest rate policy.
Speaking of inflation:
Tim Duy has a good post on the Fed’s dilemma:
The US economy is an island of mediocre tranquility in the midst of the stormy sea of the global economy. Tranquil enough to keep the Fed eyeing its first rate hike despite the surrounding storm, but sufficiently mediocre that they feel no reason to rush into that hike. As such, the Fed will remain on the sidelines until the forecast points toward sunnier skies. Uncertainty from Greece and China are likely raising the bar on the domestic conditions that would justify a rate hike. (…)
Bottom Line: The US economy is plain vanilla. Clearly not accelerating enough to justify a faster pace of monetary policy normalization, but not slow enough for the Fed to abandon their hope of at least initiating the first rate hike this year. They are still looking for stronger numbers, however, to pull that trigger. Fed officials on average are cautiously optimistic the issues in China and Greece will not spill over to the US economy, giving them the opportunity to hike rates.
Still, in the absence of confirmation of that hypothesis, those issues still decrease the odds of a rate hike this year. This is especially the case if the recent decline in commodity price places renewed downward pressure on inflation. Such an outcome would raise the bar on the strength of the remaining data to justify a rate hike. In her speech Friday, we will hopefully learn more of Federal Reserve Chair Janet Yellen’s view on the importance of Greece and China for US monetary policy.
The Bank of Korea has downgraded its forecast for gross domestic product to 2.8 per cent from a 3.1 per cent projection made in April. At the start of the year it expected to achieve 3.9 per cent growth.
The BoK estimated the country’s GDP grew just 0.4 per cent in the April-June quarter, far lower than its previous estimate of 1 per cent, as domestic spending took a hit after the spread of Mers forced schools to shut down and reduced the number of foreign tourists. (…)
“The downward revision was needed due to the impact of slowing exports, the Mers crisis and drought,” said Lee Ju-yeol, BoK governor. “But a gradual recovery is expected from the third quarter as the temporary shock of the last quarter subsides.” (…)
China Stocks Rebound; Biggest Gain in Six Years Chinese shares made their biggest daily gain in six years Thursday, restoring confidence in Beijing’s suite of attempts to rescue its struggling stock market.
The Shanghai Composite rose 5.8% to 3709.33, after losses in eight of the last 10 trading days. The smaller Shenzhen market rose 3.8%. Still, both indexes have lost around a third of their value in the past month. The small-cap ChiNext board, which has shed some 38% from its June highs, rose 3%.
Some companies that had halted trading of their shares lifted suspensions, and their stock prices immediately rose by the maximum 10%. (…) A total of 1,473 companies, or 51.1% of all stocks on the Shanghai and Shenzhen markets, remain suspended. (…)
China’s outstanding margin loans fell to 1.5 trillion yuan ($241.7 billion) as of July 8, down from 2.27 trillion yuan at its peak on Jule 18, according to data provider Wind Info. But some say the unwinding of margin loans—one of the main triggers for the recent spate of volatility—is still far from complete. (…)
From Ed Yardeni:
(…) In the past, this index was highly correlated with the price of copper, which failed to confirm the recent ascent in Chinese stock prices. Instead, the nearby futures price of copper remained near its lowest reading since July 2009.
The latest moves by Chinese officials to prop up stock prices certainly won’t revive confidence in China’s stock market. Why would anyone want to invest in a market where the government can ban selling?
Yesterday, Bloomberg reported: “China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout. Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an ‘unreasonable plunge’ in share prices, the CSRC said.”
Regulators have introduced market-boosting measures almost every night over the past several days, as the following selected timeline shows:
6/25: PBOC injects cash into the financial markets.
6/27: PBOC cuts interest rates and lets banks lend more money.
7/1: Investors allowed to put up real assets as collateral to buy stocks.
7/2: Stock manipulation will be investigated.
7/4: IPOs suspended.
7/4: People’s Daily urged investors to stay calm.
7/4: Twenty-one brokerage firms will invest $19 billion in a stock market fund.
7/7: Trading suspended in more than 1,300 companies.
7/8: State-run companies ordered to maintain holdings in listed units.
The real Grexit:
Emerging currencies in line of fire China displaces Greece as main cause for concern
(…) MSCI’s emerging equity index suffered a 2.5 per cent drop on Wednesday, its biggest in two years.
Bernd Berg, EM currencies strategist at Société Générale, said that while many EM investors had been focusing on Greece, attention had clearly shifted to China, which provided about a third of global growth.
“More and more investors will see there has been a significant drop-off in commodity prices since June, and China has clearly taken centre stage in EM.’’ (…)
EQUITIES: Testing, testing…
I am not a great fan of technical analysis but there are a few things I like watching. There are all in this chart:
This chart presents a possible roadmap for monitoring the risk of a major peak and bear market by comparing the technical similarities between the prior two market tops and where we are today.
Red Flag Number One (√)
The first technical warning sign indicated in the chart above is a significant divergence between the relative strength index (RSI) and the market itself, as we see today. This is noted by a declining pattern of lower highs in the RSI as stocks continue to make higher highs, a sign that the market is “topping out”. In the late ‘90s this divergence persisted for many years as the tech bubble reached ever-higher valuation levels. In 2007 this divergence lasted over a much shorter period (6 months) before the market finally peaked and succumbed to massive selling.
Since this divergence can persist for months or years, we also look to two other technical red flags for possible signs of a market peak and impending bear market.
Red Flag Number Two (√)
The second technical sign to look for is a major crossover in the MACD (moving average convergence-divergence) indicator shown in the bottom panel. This is often used by technical analysts as a buy and sell signal. As shown by the dotted lines, a MACD sell signal occurred near both prior market tops in May of 2000 and December of 2007. We now see the MACD buy signal issued in 2009 has crossed over to a sell, indicating the possibility of a major market top.
Important note: though I have smoothed this indicator to eliminate any prior buy and sell signals that didn’t correspond to major market turning points, as you’ll often hear, “past performance is not indicative of future results.” Since we must be alert to the possibility of a false sell signal at the current time, we look to an additional red flag for further confirmation.
Red Flag Number Three
When a major line of support becomes resistance, you now have confirmation of a possible trend change in the market. This occurred around January-February of 2001 and May-June of 2008 (see red circled regions on the chart) when the S&P 500 failed to break back above its 12-month moving average. After that point in time, the market persisted in a bearish downtrend until a confirmed change of direction with a new bull market. Currently, the S&P 500 is trading just above the 12-month moving average and has yet to break down further. If it does and fails, our third red flag will be raised.
As we all know, history does not repeat itself, but it does rhyme. Even if the same technical pattern plays out again (i.e., all three red flags come to fruition), no one can predict the exact magnitude (depth) or duration (length) of a subsequent market decline, should one occur, since no two tops or bear markets are alike. The most prudent investment strategy is to monitor market action, incoming data, and make corresponding adjustments as the situation requires. The chart presented is one of many tools for doing just that.
I particularly watch the 200 day moving average: where the Index (2045) is vs the m.a. (2056) and whether the m.a. is still rising (yes).
The S&P 500 is sitting on its rising 200 day m.a. and right on 20 on the Rule of 20.
Trailing S&P Index earnings are forecast to decline 0.8% QoQ when the Q2 earnings season is over, possibly throughing after having dropped 3.4% since Q3’14, before recovering 4.4% after Q4 if current estimates are met. This, coupled with diminishing inflation expectations, will help support valuations unless deflation risks pop up again.
Let’s watch how earnings behave over the next few weeks. Rising earnings are always the best tailwind for equities. Without the earnings tailwind, markets are a lot more vulnerable to shifting sentiments.
Corporate Earnings Will Easily Hurdle a Low Bar Falling oil prices and a rising dollar will weigh on earnings season, but health care, financials look strong.
Analysts are predicting a weak second-quarter earnings season, with profits falling for the first time since the third quarter of 2012.
As usual, however, estimates have come down to the point that Corporate America can probably clear the hurdle, “beating” lowered expectations. Analysts surveyed by FactSet Research are forecasting profit per share generated by companies in the Standard & Poor’s 500 during the second quarter to fall 4.5% to $28.70. That’s weaker than the 2.1% drop forecast in late March. (…)
Two big drags on earnings are the energy sector — far and away the weakest component of the S&P 500 — and the strong dollar, which has eaten away at foreign earnings for U.S. multinationals. The market collapse in China, rising labor costs in the U.S., and hints of deflation in a lackluster global economy have added to the headwinds. (…)
Energy company profits are expected to fall a whopping 54% this year. Remove the sector from forecasts, and the S&P sees better than 8% profit growth, powered by double-digit earnings increases for the health-care, financial, and consumer discretionary sectors. (…)