Come July, Janet Yellen and the FOMC are going to once again ‘punt’ hiking interest rates in favor of waiting for ‘global instability’ due to the ‘Brexit’ to subside. However, as stated this is a mistake for a couple of reasons.
First, with the markets making new all-time highs, there is a ‘price’ cushion available for the markets to absorb a rate hike without breaking important downside support.
Secondly, with Central Banks globally flooding the markets with liquidity, a further ‘shock absorber’ is currently engaged in softening the impact of a rate hike.
Lastly, the economy is likely going to show a bit of ‘strength’ in upcoming reports, with slightly stronger inflationary pressures. This pickup in economic strength will be another inventory restocking cycle following several months of weakness. As has been in the past, it will be transient and that strength will evaporate as quickly as it came.
If I was Janet Yellen, I would hike interest rates by .50 bps immediately in a surprise announcement and use the price and Central Bank liquidity cushions to soften the blow. This would move the Fed towards its goal of reloading its primary policy tool while there is some ability to temporarily control the outcome of the rate hike.
But that is just me. She won’t do it.”
Now the question will be her excuse will be for not hiking rates in September to keep from affecting the outcome of the Presidential election. As my friend Danielle DiMartino-Booth
In that regard, something important happened recently. And not many people noticed. I’ll do a quick review to explain.
In Congressional testimony last February, a member of Congress asked Janet Yellen if the Fed had legal authority to use negative interest rates. Her answer was this:
In the spirit of prudent planning we always try to look at what options we would have available to us, either if we needed to tighten policy more rapidly than we expect or the opposite. So we would take a look at [negative rates]. The legal issues I’m not prepared to tell you have been thoroughly examined at this point. I am not aware of anything that would prevent [the Fed from taking interest rates into negative territory]. But I am saying we have not fully investigated the legal issues.
The US dollar index now down about 1%, recovering a bit of the initial plunge after the “unexpectedly” weak GDP report. Against the Yen, the dollar is doing much worse, down about three percent.
US Dollar Index Reaction to US GDP
US Dollar vs. Yen
Direction on the above chart is opposite the first. The Yen has strengthened about 3%. Some of that is due to a US GDP reaction, but the bulk of the move is on the heels of a market reaction to actions by the bank of Japan.
As noted previously, a portion of those revisions are related to a construction spending data error that goes back ten years.
Let’s take a look at the revisions.
GDP as Revised
2013 Q1: +0.9 percentage points
2013 Q2: -0.3 percentage points
2013 Q3: +0.1 percentage points
2013 Q4: +0.2 percentage points
2014 Q1: -0.3 percentage points
2014 Q2: -0.6 percentage points
2014 Q3: +0.7 percentage points
2014 Q4: +0.2 percentage points
2015 Q1: +1.4 percentage points
2015 Q2: -1.3 percentage points
2015 Q3: unchanged
2015 Q4: -0.5 percentage points
Because of construction errors I was pretty sure 2015 would be revised lower and I expected 2014 to go up. The latter appears to be flat.
For 2013, upward revisions to inventory investment, exports, and residential and nonresidential fixed investment were partly offset by a downward revision to personal consumption expenditures (PCE).
For 2014, a downward revision to inventory investment, an upward revision to imports, and a downward revision to state and local government spending were offset by upward revisions to exports, PCE, and residential fixed investment.
Now that the narrative of rising gasoline demand and a "strong summer driving season" is finally over, courtesy of gasoline stocks that just refuse to drop…
… and a glut in PADD1 that has never been greater…
… defenders of the "bull" crude oil thesis are stumped. "Doubts are rife as to whether the oil supply imbalance is indeed slowly drawing to an end," Stephen Brennock of oil brokerage PVM, said.
So with no fallback "story" both WTI and Brent are down 20% since their last peak in June, as another bear market for oil has arrived.
Worse, earlier today we got confirmation that another parallel narrative, namely that OPEC is cutting its production, is also dead and buried. According to a Reuters survey, OPEC's oil output is likely in July to reach its highest in recent history, as Iraq pumps more and Nigeria manages to export additional crude despite militant attacks on oil installations. Top OPEC exporter Saudi Arabia has kept output close to a record high, the survey found, as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices. Supply has been rising since OPEC abandoned in 2014 its role of cutting supply to prop up prices as major producers Saudi Arabia, Iraq and Iran pump more.
According to the survey, OPEC supply rose to 33.41 million barrels per day in July from a revised 33.31 million bpd in June.
There's more: OPEC's production could rise even further should talks to reopen some of Libya's oil facilities succeed. Conflict has been keeping Libyan output at a fraction of the pre-war rate. "This could shortly release more oil into an already abundantly supplied market," Carsten Fritsch of Commerzbank said, although earlier hopes of a restart have not been realized. "It therefore remains to be seen whether this time will be different."
It won't be different. As Reuters notes, OPEC's output has climbed due to the return of former member Indonesia in 2015 and another, Gabon, this month, skewing historical comparisons. July's supply from the remaining members, at 32.46 million bpd, is the highest in Reuters survey
Despite the huge miss compared to expectations, Bloomberg Econoday managed to put a positive spin on this mess.
Second-quarter GDP looks very weak at only a plus 1.2 percent annualized rate, but the details are positive. The biggest positive is consumer spending where growth, showing strength across readings, came in at a stellar 4.2 percent rate, more than double the first-quarter’s 1.6 percent rate.
A plus for the economy but a big negative in this report is slowing inventory accumulation which pulled down GDP by 1.2 percentage points in the quarter. But lean inventories point ahead to new accumulation which is a plus for future production and employment.
Another negative in the report is a reversal in residential investment, which had been running in the double-digit zone but which fell at an annualized 6.1 percent to pull down GDP in the second quarter by 2 tenths. A central concern remains nonresidential fixed investment, falling at a 2.2 percent rate and pulling down GDP by 3 tenths in the quarter. Weakness here points to weakness in business confidence and trouble ahead for productivity growth.
The first estimate for second-quarter GDP is expected to come in at plus 2.6 percent for a sizable gain from first quarter growth of 1.1 percent which was held down by severe weakness in nonresidential fixed investment. Retail sales rose sharply in the second quarter and are expected to feed strong gains for the consumer spending component, offsetting what is expected to be continued weakness in business investment, slowing in residential investment, and slowing in inventory accumulation. The GDP price index, reflecting energy prices, is expected to accelerate sharply, to plus 1.8 percent from 0.4 percent in the first quarter.
The inventory-to-sales numbers remain in the stratosphere so it is beyond absurd to spin inventories as a huge positive.
Attorney General Loretta Lynch of the U.S. Department of Justice
The Wall Street Journal reported yesterday that the U.S. Department of Justice in Washington D.C. and its U.S. Attorney’s office in Manhattan “have launched a criminal investigation into whether individuals at Mossack Fonseca & Co., the law firm at the center of the ‘Panama Papers’ scandal, knowingly helped its clients launder money or evade taxes…”
That investigation, if conducted thoroughly and without improper interference, could turn up the heat on some powerful Wall Street players.
On May 16 Wall Street On Parade broke the story that the Miami office of Citigroup’s Private Bank at 201 South Biscayne Blvd. was the listed address for dozens of offshore companies whose agent is Mossack Fonseca. (See graph below.) Our information was obtained from a search of the public database made available by the International Consortium of Investigative Journalists (ICIJ), which received more than 11.5 million leaked files from the Panama-based law firm, Mossack Fonseca. ICIJ calls Mossack Fonseca “one of the world’s top creators of hard-to-trace companies, trusts and foundations.”
Prior to Citigroup’s implosion and bailout in 2008, it reported its major subsidiaries to the Securities and Exchange Commission. In this report from 2006, Citigroup showed more than 1600 major subsidiaries with more than five dozen in secrecy jurisdictions. As Citigroup came under serial investigations by the Justice Department and other Federal regulators, its list of subsidiaries shrank dramatically. But as we reported in 2014, that doesn’t mean the subsidiaries are actually gone – many are simply just not listed any longer in an out-of-sight-out-of-mind kind of operation.
Wall Street hedge funds may also come under the microscope. Hedge fund titans have turned up in the Panama Papers database or earlier leaked documents that are now part of the ICIJ database.
"You have this huge portion of the populace in both the U.K. and the U.S. that is so angry and so helpless that they view exploding things without any idea of what the resulting debris is going to be to be preferable to having things continue," Glenn Greenwald told Slate. (Photo: Gage Skidmore/flickr/cc)
Donald Trump poses "extreme dangers" to the United States and the world, journalist and co-founding editor of The Intercept Glenn Greenwald says in a new interview published at Slate.
But to stop the GOP presidential nominee from getting elected, "U.S. media and U.S. elites" must take a lesson from the recent Brexit debacle, he warns—and bending over backwards to link Trump to Russian President Vladimir Putin isn't the right approach.
"U.K. elites were uniform, uniform, in their contempt for the Brexit case, other than the right-wing Murdochian tabloids," Greenwald told Slate contributor Isaac Chotiner by phone.
"They all sat on Twitter all day long, from the left to the right, and all reinforced each other about how smart and how sophisticated they were in scorning and [being snide] about [U.K. Independent party] and Boris Johnson and all of the Brexit leaders, and they were convinced that they had made their case," he said. "Everyone they were talking to—which is themselves—agreed with them. It was constant reinforcement, and anyone who raised even a peep of dissent or questioned the claims they were making was instantly castigated as somebody who was endangering the future of the U.K. because they were endorsing—or at least impeding—the effort to stop Brexit. This is what's happening now."
Do you think the people voting for Donald Trump because they feel their economic future has been destroyed, or because they are racist, or because they feel fear of immigrants and hate
The markets expected the Bank of Japan to unleash lower yields further into negative territory at its Friday policy meeting.
Instead the board voted to keep rates unchanged and to maintain existing monetary base targets. But the BoJ did vote to increase equity ETF purchases and increased US dollar swaps.
This set of moves led to some wild moves in the Nikkei, and a 1.6% increase in the Yen vs. the US dollar.
Wild Ride in Nikkei
The initial reaction was hugely negative. That was followed by a rebound to break even, another plunge, then a rally back to the green, all in a short time span.
Saxo bank chief economist Steen Jakobsen pinged me the key takeaway was the doubling of its US dollar loan facility is an admission of a dollar funding crisis but otherwise the rest of the policy statement was weak.
The potential mover and shaker this morning was the surprisingly weak Advance Estimate of GDP for Q2, not to mention the downward revisions to the two previous quarters. But no worries for the market! The S&P 500 hits its -0.30% intraday low about 30 minutes into the trade and then bounced to its 0.32% intraday high during the lunch hour -- a record intraday high for that matter. A bit of zigzagging in the afternoon cut the closing gain in half to 0.16%, just a tad shy of a record close.
The bond market took a somewhat different view. The yield on the 10-year dropped six basis points to close at 1.46%. That's nine BPs off its all-time closing low and 11 BPs below its close on July 22, when the S&P 500 set its latest record close.
Hillary and the federal government are determined to ensure a "fair" and "open" election this November and will stop at nothing to reverse discrimination against "oppressed" segments of the American electorate, well at least if you live in a large swing state. This morning, the WSJ reported that the Fourth U.S. Circuit Court of Appeals in Richmond, Virginia struck down North Carolina's voter ID law just days after we ...
By Jacob Wolinsky. Originally published at ValueWalk.
NetSuite Inc (NYSE:N) is soaring this morning as Oracle Corporation (NASDAQ:ORCL) has made a bid to buy the company for $9.3 billion. This deal has been rumored for some time but obviously few expected such a large premium or did not think the bid was certaintly coming as the stock is up about 18 percent at the time of this writing which is a lot for a tech giant. Here is what the sell side is saying.
NetSuite – analysts react
Should the transaction take place, Oracle would pay about 9x NTM EV / revenue (based on consensus estimates for NetSuite), above the average multiple paid in our precedent SaaS Software acquisitions analysis of 6.8x . Additionally, Oracl...
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After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
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