Interest Rate Announcement – All Eyes On The Fed

Interest Rate Announcement - All Eyes on the Fed


Interest Rate Announcement – All Eyes on the Fed – Today

Market Overview

Equity markets are in the green this morning with the exception of China’s majors, which are still prone to show volatility – witnessed by today’s 4.5% drop in the Shenzhen composite index.  S&P futures are up marginally on the back of Apple’s 6% jump while overseas markets are strong. Europe is up higher by 1% and the Nikkei closed up 1.7%, after Japan announced a new fiscal stimulus program.

Bonds and currencies are mixed with the only notable move being a drop in Japan’s Yen.  Loonies are little changed from yesterday, at their weakest level since March as oil prices remain soft and US 2 year yields climb vs. their Canadian equivalents.

FOMC

Today is Fed day with the rate announcement out at 2pm.  There is little doubt rates will remain the same, with the probabilities of a hike at a mere 10%.  That would be our guess too.  The statement will likely be the bigger deal if the Fed is going to add back in any hawkish words.  We wouldn’t expect that but one could argue the world has become a much better place.  Let’s see, the Fed has used a high dollar, soft domestic data, soft global data (China) as reasons to back off raising rates.  Most of these are not evident at the moment.  Sure there is Brexit, but even the European data has improved.  In a year of surprises, the Fed could provide us with another one.

Negative Rates and Wealth

Lower (and negative) yields indicates higher levels of wealth?  Sure, it intuitively makes sense that the sum of future interest payments on liabilities is lower because of lower interest rates. Moreover, the value of your assets could be higher, if you own bonds from higher yields.  Tyler Cowen makes the case for negative yields as a sign of prosperity.  Dr. Cowen also makes the analogy we have made that bonds within a portfolio are now insurance against the failure of the risk assets.  This doesn’t mean you shouldn’t own them… it just means in most normal cases, their returns will be limited.

Projected Returns

Blackrock is the world’s largest asset manager.  While pretty close to consensus, here are their asset class returns projections for the coming 5 years (via Chris Bailey).  We present this as entertainment, as these types of projections rarely wind up being accurate.

US Real Estate

History echoes:  Bloomberg reports on sky-high real estate prices in San Francisco being met my zero-down, low interest mortgages in the high-wage low-asset world of Silicon Valley.

UK Retail Sales

UK retail sales fell 14% percent in July as consumers held back in the aftermath of the Brexit vote. This was the worst reading since January of 2012. The outlook for next month is not much better. Even so, the outlook is not exactly surprising. Firms and consumers are likely to remain cautious in the near term as they digest the implications of the referendum vote.

The UK’s economy has slowed down; however, the markets have not reacted in the same way. The GBP is down ~1900 pips against the USD since before the Brexit vote. That said, European equities have held up remarkably well. One reason is that there is an almost unanimous view that the BOE will ease monetary policy in August. This would add fuel to the ECB’s fire and support risk assets. High expectations are not a bad thing but they come with high risks. If the BOE disappoints then the fallout may be worse than it would have been if the market wasn’t so optimistic. More from Bloomberg here.

Punk Economics

Inequality, Race, Trump & Gandhi! – via David McWilliams

Diversion

My Life After 44 Years In Prison.  Via Al Jazeera


Company News

Apple is soaring in premarket trading after a strong earnings print. Sales demand surprised and average sales prices did not fall as much as expected. Comcast reported better than expected earnings this quarter as fewer people cut the cable cord than were expected to. Only 4,000 cut cable services; last year during the same quarter 42,000 cut their cord. Boeing reported its first quarterly loss in seven years after taking a $2.1bb write-down. The losses come from the struggling Dreamliner and development issues with an aerial tanker. Loblaw beat estimates as strong sales from Shoppers, +4% same store sales, buoyed results. CGI reported strong earnings and in line revues this quarter but its backlog grew by $916mm and bookings were up $712mm. Gildan Activewear has reduced its guidance this morning for revenue and future expansion plans.


Commodities

Oil is down again this morning after data showed that stockpiles at Henry Hub rose again last week amid already a glut of supply. The bigger concern people are worried about now is the rising gasoline inventories that are piling up. There hasn’t been enough driving to keep up with the refinement of oil to petroleum. Coal prices have led this recent commodity rally but analysts fear it has gone too high too fast. Demand is expected to fall another 10% in Europe this year, with similar expectations in most developed regions.  Even China is expecting a usage reduction of 3.5% in 2017.

Interest Rate Announcement - All Eyes on the Fed


Fixed Income And Economics

Treasury markets are rallying (again with equities, go figure) on the expectation that the FOMC will not hike their lending rate at today’s 2PM announcement. Fed futures have kept their 10% likelihood for a tightening move for several days now so clearly the market doesn’t think they are going to do anything. One can argue that voting officials have been sitting on their hands for months now as they await the “perfect” opportunity to tighten credit conditions so as not to shock markets. However, we’ve argued in the past that the window to hike (and make good on their silly dot plot forecast) could not be any better right now with many stars aligned.  Event risk is low with the Brexit shock all but eliminated, contagion fears greatly exaggerated, and both the BoJ and ECB ready to launch bazooka stimulus measures as needed. Financial conditions are stronger than ever with U.S. equity indices at all-time highs, Treasury yields at all-time lows, high yield spreads at multi-year lows, and commodity prices well off their bottoms. The data front has been more than supportive with manufacturing conditions humming along, unemployment extremely subdued, and core inflation at the 2% target. This alignment of generally excellent conditions will not last forever and the chance of policy complacency could come back to haunt Janet Yellen & Co. down the road. The Fed’s messaging and signaling has been inconsistent and driven by its concerns about the likely market reaction — perhaps because the markets responded quite violently to the one 25 basis point rate rise last December (the first since the financial crisis). Today’s statement-only affair is unlikely to roil markets but we will be watching for a much more hawkish tone with the possibility of one or even tow dissenting votes.


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