Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…
The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.
Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.
According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars. Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number. If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.
So if you have a family of four, your family’s share of the global debt load would be $86,856.
Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.
The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.
Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.
The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.
Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.
Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.
Amid a fresh escalation in a row over its bailout conditions, Greece’s stubbornly high unemployment rate is showing no sign of improvement.
The country’s jobless rate – which is the highest in the eurozone and has been above 20 per cent for six years – stuck at 23 per cent in November despite a general uptick in its economic prospects at the end of 2016.
It comes as the country’s creditors in the EU and the International Monetary Fund have publicly clashed over their respective forecasts for the state of the economy and the level of austerity attached to Greece’s three-year bailout programme this week.
The IMF has been accused by Athens and Brussels of an “overly pessimistic” view on the Syriza government’s ability to hit a 3.5 per cent budget surplus target over the next decade, which has led it to a wrong-headed forecast on Greece’s “explosive” debt dynamics.
The Fund’s latest report on the Greek economy suggest its debt-to-GDP mountain could reach 275 per cent over the next two decades without major debt restructuring. Unemployment meanwhile will only fall to 21.7 per cent this year, while the country’s long-term growth rate was downgraded to 1 per cent, IMF economists predict.
While Yellen is still speaking, here is Goldman’s assessment of what the FOMC meant with its statement:
BOTTOM LINE: The FOMC raised the funds rate target range, as widely expected. In the accompanying projection materials, the median estimate of rate hikes for 2017 increased, and now shows three hikes for the year instead of two. The statement said that the committee aims to see only “some” further improvement in labor market conditions.
1. The FOMC announced an increase in the target rate for the federal funds rate to 0.50-0.75% from 0.25-0.50%, as widely expected. The post-meeting statement indicated that an increase was warranted due to “realized and expected labor market conditions and inflation”. The committee said that the stance of policy remained “accommodative” (rather than “moderately accommodative”, as in Chair Yellen’s recent Congressional testimony), which would help achieve “some further strengthening” in the labor market—with the “some” qualifier added to the statement at this meeting. Elsewhere the statement noted that the economy has been “expanding at a moderate pace”, and noted that inflation expectations in the bond market had increased “considerably”.
2. In the Summary of Economic Projections (SEP), participants made relatively few changes to their economic projections, but some upgraded their projections for the funds rate. The median projections for the funds rate showed three rate increases next year, up from two at the September meeting, with no changes to the number of hikes in 2018 and 2019. Longer-run projections for the funds rate also edged up, with the median rising to 3.0% from 2.9% previously. Elsewhere, the SEP showed slightly higher growth and headline inflation and lower unemployment for this year and also slightly higher growth and a lower unemployment rate for 2017. With a stable long-run unemployment rate but lower unemployment rate projections in 2017 and 2019, the higher projected pace of hikes next year may reflect the committee’s assessment that the economy is close to full employment.
Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”
Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
Fiscal stimulus in the U.S. will help reflate the economy
No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
The Emerging Markets risk ‘Trump tantrum’ is temporary
Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
Monetary policy will increasingly focus on credit creation
2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar
Kristian Rouz – Capital expenditures on investment and dividend payments in the US corporate sector have been outpacing the total cash flow, or earnings, since mid-2015, stirring worry regarding the sector’s lack of profitability. Meanwhile, the total volume of expenses has been above cash flow since mid-2011, resulting in the currently mounting concern that this will result in underinvestment, an accelerated slowdown or a recession. The rising amount of corporate debt in one of the main concerns, and the broader demand-side policies’ failure to revive private sector growth has only added to the economic dismay.
The year-on-year pace of economic expansion has slowed to roughly 1pc in the past quarter, and while the figures for 3Q16 are being prepared for release later this month, the New York Fed has lowered its projections for the quarter. Having previously expected an acceleration in growth to above 3pc annualized, the New York Fed is currently expecting growth of 2.22pc year-on-year, with the growth projection for the year of 2016 lowered to just 1.40pc at best. The “Nowcast” model, used by the regional regulator, takes multiple broader economic parameters into account, including business sentiment, manufacturing activity, and consumption, among others. The slowdown in economic activity in October and September’s slump in housing starts have resulted in the lowered forecast.
The deceleration in the economy is mainly attributed to mounting disinvestment pressures, even though base interest rates are ultra-accommodative. The overregulated economy is losing momentum, and the lack of funds readily available for investment and reinvestment in the corporate sector is another concern.
Speaking during the October 6 opening ceremony, IMF Managing Director Christine Lagarde referred to the global economy as “weak and fragile.”
Radio Sputnik’s Loud & Clear producer Walter Smolarek noted that, on one hand, the economy of the West has not completely recovered from the recession of 2008-2009, despite significant measures taken by financial regulators. These measures have resulted in only temporary fixes that have failed to return the global economy to where it was prior to the recession.
Those countries, such as BRICS members, that could count as real engines of post-crisis world economic growth have had a “very rough few years,” Smolarek says, due, in part, to low commodity prices. A dramatic oil-price drop caused a cascade of other negative economic effects in those countries.
Smolarek notes, however, that when Lagarde speaks about a “weak and fragile” economy, she is speaking about the top of the economic food chain, primarily the largest financial institutions and multinational corporations. But these entities, when faced with challenges, simply divert the negative economic impact down the chain, where the working class suffers the effects. For the working class, however, the IMF offers no solutions and, indeed, hardly addresses the issue as relevant to their message.
The Dow Jones industrial average ended 0.5% lower on the final day of a volatile week on Wall Street as traders looked ahead to next week’s Federal Reserve meeting on interest rates.
Stocks moved off session lows up to the 4 p.m. ET close. The Dow limited its losses to under 100 points, falling 89. The Nasdaq and S&P 500 posted smaller losses in percentage terms, down 0.1% and 0.4%, respectively.
If there’s a silver lining to Friday’s weak trading session, it is that this week’s market volatility has been to the upside.
The Dow was up about 90 points for the week. And while the wild market swings continue — as investors gauge whether central banks will continue to support markets at levels of the past — the moves have skewed to the upside after last Friday’s nearly 400-point rout. While the Dow has posted three triple-digit moves this week, two of them have been of the bullish flavor. The Dow soared nearly 200 points yesterday, offsetting a nearly 260-point drop Tuesday. The blue chip gauge kicked off the week Monday with a 240-point surge.
Weighing on market sentiment Friday was more turbulence in the banking sector, in this case in Europe.
The U.S. Justice Department is seeking a $14 billion civil settlement with Deutsche Bank over the German financial institution’s alleged role in artificially propping up the U.S. housing market in the lead up to the Great Recession.
Weakness in the oil patch was also weighing on the broader stock market. The price of U.S.-produced crude was down $1.06, or 2.4% to $42.85.
In the bond market, the yield on the 10-year Treasury note inched up to 1.702%.
India has seen a salary growth of just 0.2 per cent since the great recession eight years back, while China recorded the largest real salary growth of 10.6 per cent during the period under review, says a report.
According to a new analysis by the Hay Group division of Korn Ferry, India’s salary growth stood at 0.2 per cent in real terms, with a GDP gain of 63.8 per cent over the same period.
During the period under review, China, Indonesia and Mexico had the largest real salary growth at 10.6 per cent, 9.3 per cent and 8.9 per cent, respectively.
Meanwhile, some other emerging markets including Turkey, Argentina, Russia and Brazil had the worst real salary growth at (-) 34.4 per cent, (-) 18.6 per cent, (-) 17.1 per cent and (-) 15.3 per cent, respectively.
“Most emerging G20 markets stood at either one end of the scale or the other either amongst the highest for wage growth, or amongst the lowest. However, India stood right in the middle, with all the mature markets,” the report said.