Janet Yellen Signals Caution on Rates Federal Reserve Chairwoman Janet Yellen flagged risks to the economic outlook that could delay the central bank’s plans for raising short-term interest rates, in her semiannual testimony to Congress on U.S. monetary policy.
In the first of two days of semiannual testimony before House and Senate committees, Ms. Yellen on Wednesday said falling stock prices and other financial-market turbulence could impede economic growth, as could stresses in China and other foreign economies.
Further complicating matters for the Fed, she also pointed out that market expectations for consumer prices are sinking, a sign investors might be losing faith in the Fed’s ability to lift inflation to the 2% target it has undershot for more than three years.
“Financial conditions in the United States have recently become less supportive of growth,” Ms. Yellen said, pointing to stock-market declines and higher interest rates for riskier borrowers, among other events. (…)
While the official unemployment rate has receded to 4.9%, Ms. Yellen acknowledged labor markets are still heavy with part-time workers who want full-time employment and discouraged individuals who want work but aren’t looking. (…)
She brushed off worries that the U.S. is heading back into recession, and pointed to the benefits households are reaping from low gasoline prices and steady job growth. The average American household is saving $1,000 a year from low gasoline prices, she estimated. Moreover, she pointed to tentative signs that worker wages are picking up.
“Let’s remember that the labor market is continuing to perform well, to improve. I continue to think that many of the factors holding down inflation are transitory,” she said. (…)
Not only gasoline as Doug Short illustrates:
Sweden cuts rates deep into negative territory Move rattles markets on fears of global race to lower rates
(…) “There is excessive debt everywhere and negative interest rates are dangerous… My number one fear? That’s the same as asking me where it will start. When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable... Central Bank models are just wrong” (…)
Global Stocks Swoon as Investors Seek Havens Global stocks staged a sharp retreat as a cautious tone from the Federal Reserve, downbeat company news and a fresh fall in oil prices fueled anxiety about the health of the world economy. U.S. futures point to a sharply lower open. Stoxx Europe 600 fell as much as 3.9% as banking and mining shares tumbled.
Société Générale Shares Plunge After Profit Warning Société Générale Chief Executive Frédéric Oudéa said investors were overreacting as the French lender’s shares plunged over 14% after it warned that it could miss its profit target this year.
The bank said that because of difficult market conditions and tighter regulation it may not reach its targeted 10% return on equity in 2016.(…)
European bank shares have suffered sharp losses since the beginning of the year due to concerns over sometimes thin capital levels and low profitability.
“There’s a disconnect between what we’re seeing in the markets and the real economy,” said Mr. Oudea.
European bank shares continued to slide Thursday, with the Stoxx Europe 600 index down 5% late morning. (…)
The bank said its core tier one ratio, which compares top quality capital such as equity and retained earnings with risk-weighted assets, stood at 10.9% in December, up from 10.5% in September.
Société Générale said it targeted a core tier one ratio of 11.5% to 12% by 2019.
The bank’s leverage ratio, which measures capital held by the bank against its total assets, also rose to 4%, from 3.9% at the end of September.
From Bloomberg’s Gadfly:
SocGen’s quarterly results, which missed forecasts, were a microcosm of the unknowns facing Europe’s banks. The lender saw loan-loss provisions surge at its corporate and investment bank, citing “cautious” provisions on the bank’s oil and gas lending and also on one unidentified European company. An extra litigation charge effectively soaked up all of the gains from selling its stake in asset manager Amundi. The bank also said it was going to be difficult to hit profitability targets for 2016 because of “headwinds” — in other words, things may get worse. (…)
Here’s a deeper analysis (my emphasis):
What seems to be driving the 2016 bank stock sell-off is a re-evaluation of how equity markets account for the book value of financial institutions in a world of NNIM (negative net interest margins) and eurodollar outflows.
But also, we should think, the degree to which NNIM itself is influenced by the sound of a giant vacuum cleaner sucking petrodollars out of the non-US banking system, the commodity-credit feedback loop of hell and the general subpriming of commodities through the repo collateral markets.
To cut a long story short: if we’ve arrived at a point where commodity collateral is no longer considered safe, that’s one less safe asset in the system, and a helluva lot more pressure on the remaining safe assets (government bonds) to protect par value.
Which ever way you look at it, banks don’t do well in this framework(…)
Negative rates are and remain an inevitable precursor to the death of the banking model (which includes fintech). Or at least to the realisation that protecting economic par value for investors is really really hard if you favour rent extraction investments over ones in productivity.
Europe’s Battered Banks Are Far From Crisis The European banking sector has far more capital and stable funding than at any time in the past seven years, Simon Nixon writes.
(…) The Euro Stoxx bank index is down 27% this year and 42% since its April 2015 peak. The drop has been accompanied by sharp moves in bank credit markets, not least steep falls in the prices of a previously obscure form of bank debt called a contingent convertible, or CoCo, which is a bond that stops paying its coupon or even converts into a share if the regulator thinks the bank is running low on capital.
These moves have been particularly unsettling for all those analysts who for much of the past year have been recommending bank shares as a way to play the European recovery story—as well as for the investors who took their advice. For many, the scale of the slide in bank shares has been a surprise. Bewilderingly, the world is once again asking whether the European banking system is on the brink of meltdown, heading for a repeat of 2008 or 2011. (…)
Bank analysts have long warned that negative interest rates could be highly damaging to the banking system, forcing banks to choose between accepting lower profits or passing on the cost to customers, which would amount to a tightening of financial conditions, which in turn could hurt the recovery. One would expect that the scale of this week’s market reaction will certainly be prompting some urgent thinking in Frankfurt
Other factors have also clearly been weighing on bank shares. Investors are worried about the possible scale of losses on energy-related exposures given the collapse in the oil price. European banks have an estimated 38% of a $371 billion global pot of energy-related loans and could face losses of up to $27 billion, according to Alastair Ryan of Bank of America Merrill Lynch.
But this would account to around 6% of industry pretax profits over the next three years, which should be manageable for most banks. At the same time, sharp falls in Greek, Portuguese and Italian bank shares reflect particular challenges in those markets, relating to high levels of nonperforming loans still sitting on bank balance sheets.
Taken together, these factors certainly justify recent bank earnings downgrades and some adjustment in share prices. But do they point to a European banking sector once again on the brink of a systemic crisis? Hardly.
The industry today has far more capital, much more stable funding, greater access to central bank facilities and faces a much more stable regulatory system than at any time in the past seven years. The solvency of the overwhelming majority of banks isn’t in question.
This week’s panic over Cocos appears to have been largely born of confusion over how these instruments work, with the market extrapolating from what turned out to be unwarranted fears that Deutsche Bank might be obliged to miss a coupon on one bond for one year into generalized fears that European bank bond investors faced a mass bail-in.
In fact, the biggest risk that the market faces is that the recent panic becomes self-fulfilling: that rattled or distressed investors—including sovereign wealth funds forced to dump assets into illiquid markets as government budgets come under pressure from falling oil prices—continue to dump bank shares, spooking depositors and credit markets, pushing up bank funding costs, causing banks to rein in lending and push up loan prices, which squeezes the economy and their own earnings.
Of course, it could happen. Alternatively, investors may decide that at a time more than $6 trillion of global debt is trading at negative yields, the chance to buy well-capitalized banks operating in a growing European economy at yields of over 5% is a risk worth taking. After all, that is how market corrections usually end: when there are more buyers than sellers.
(…) The industry’s 73 percent plunge from a 2011 peak is far beyond the oil industry’s 49 percent loss during the same time. (…)
This year may be the worst yet with prices trending lower for longer, according to Anglo American Chief Executive Officer Mark Cutifani, who says his company should be better prepared “for the winter that inevitably comes after the summer.” (…)
Rio Tinto Group is also preparing for a tough year, with CEO Sam Walsh predicting on Bloomberg Television on Thursday that distress from the commodities rout will spread to majors. (…)
“Excess supply is awash in most commodities and as painful as it is, economically and rationally it needs to leave the market to create a long term sustainable future,” said Graham Kerr, CEO of South32 Ltd., the spin-off of BHP Billiton. (…)
- 353 companies (82.2% of the S&P 500’s market cap) have reported. Earnings are beating by 4.4% while revenues have met expectations.
- Expectations are for a decline in revenue, earnings, and EPS of -3.3%, -4.7%, and -2.8%. EPS is on pace for -2.1%, assuming the current beat rate for the remainder of the season. This would be +4.1% excluding Energy.
Good stuff from Ben Carlson:
Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.
Bull Markets: Everything I buy is going up — I’m a genius.
Bear Markets: Everything I buy is going down — I’m an idiot.
Bull Markets: See, fundamentals always win out.
Bear Markets: See, technicals and sentiment rule the markets.
and many more…
(…) “My attitude is that both Piketty and Sanders are a little nuts,” Munger said. “If you want to look at what non-egality brings us,” people should look at the Soviet Union, Communist China and North Korea, he said.
Munger said he understands resentment about what he called “undeserved” fortunes, like the wealth that some money managers can accumulate through tax advantages. Yet Munger said that for a democratic country, inequality is a natural outcome.
“As an intellectual he’s a disgrace,” Munger said of Sanders. “Now, I don’t think he’s any worse than some of our Republicans. But at least they’re crazy in a different way.”