Monday, July 11, 2016

Bonddad Tuesday Linkfest

Fed President George Argues For Slowly Increasing Rates (Denver Post)

Federal Reserve Bank of Kansas City president Esther George said Monday she wants the U.S. central bank to get back to raising short-term interest rates gradually to reflect progress on hiring and inflation.

George deemed the current level of short-term rates maintained by the Fed as “too low given the progress we’ve seen in the economy.” She also said keeping rates at super-low levels raises the risk financial markets will run into trouble as an additional factor arguing in favor of lifting the cost of borrowing.

“Gradual adjustments” in short-term interest rates mean the Fed is more likely to achieve its growth and inflation goals, George said. She added that the economy is near full employment levels, the housing sector is continuing its rebound and price pressures are moving back to the levels targeted by the central bank. All of this means short-term rates should move toward “more normal levels,” the Fed official said, while acknowledging a so-called normal rate is not a precise concept.


George, as has long been the case, finds herself arguing for actions other central bankers don’t appear to be ready to take. That suggests she is very likely to be casting a dissenting vote at the FOMC meeting later this month.

Why Are Global Rates So Low (Wonkblog)

The following paragraph strongly implies that global negative/low rates are in the middle of an endless loop, which is a very scary proposition.

The rest of the world has only made this more true. That's because zero interest rates in one country exert a kind of gravitational pull on interest rates in another. They're "contagious," as economists Gauti Eggertsson, Neil Mehrotra, Sanjay Singh and Larry Summers put it. Here's why: if you have zero interest rates and are expected to for a while, then capital will flow into my economy every time I even consider raising my own. Money, after all, moves to where it thinks it can get the best return. But on a less happy note, this will push my currency up so much that my exports will start to lose competitiveness. And that, in turn, will slow my economy down enough that I won't actually have to raise rates. Instead, I'll keep them around zero — just like yours. The same kind of thing happens any time there's any financial turbulence in the world. Investors stampede into the safe haven that is U.S. government debt, pushing down yields and pushing out expectations of rate hikes.

What’s consistent with the data, instead, is the notion that investors are throwing in the towel and accepting secular stagnation as the new normal. Almost 8 years after Lehman, no sign of a really strong recovery in sight anywhere; perceived private-sector investment opportunities remain weak. Stock and land prices are pretty high, but probably because of low discounting rather than expected high returns. 

The U.S. earnings recession waylaying the seven-year-old bull market has been a long one by any standard. Measured by depth, however, it isn’t registering -- either with history or investors.

Quarterly profits in the S&P 500 Index are about to fall again, extending a streak of declines poised to match the longest earnings retreat on record, data compiled by S&P Dow Jones Indices and Bloomberg show. At the same time, net income in the gauge is down 18 percent from its 2014 high -- a retreat that is less than half the size of the last three drops and pales next to the 28 percent average in recessions since 1936.

While the lack of profit growth explains why the S&P 500 struggled to advance for more than a year, the less-heralded shallowness of the decline is key to understanding the market’s resilience. The equity benchmark is heading for an all-time high after posting a second week of gains following the Brexit selloff and recovering from two separate 10 percent corrections in 10 months.

Y/Y Percentage Change in Corporate Profits from St. Louis Fred

5-Year Chart of Actual Level of Corporate Profits 

Wall Street analysts have taken an axe to profit forecasts for the biggest US banks, fearing that the US Federal Reserve — spooked by sluggish job growth and the UK vote to leave the EU — will hold off on pushing up interest rates.

After the Fed’s first post-crisis bump in rates last December, many analysts had been counting on more increases to help boost bank earnings throughout this year and next.

But with JPMorgan Chase due to start the second-quarter reporting season this week, analysts now believe those assumptions look too bullish because of the market turmoil unleashed first by slumping oil prices and then the UK’s referendum on EU membership.

Analysts at Credit Suisse have stripped out any expectation of higher rates from its estimates for US banks’ profits in 2016 and 2017. Barclays and Morgan Stanley have also docked forecasts, noting that investors rate the chances of a rate rise from the Fed this year at about 20 per cent, down from about 75 per cent before the Brexit vote.

1-Year Chart of the KRE ETF

1-Year Chart of the XLF ETF