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Thursday, December 3, 2015
Lower markets after Yellen signals a December rate hike
Dow dropped 61, decliners over advancers 2-1 & NAZ fell 11. The MLP index plunged 8+ to the 279s, a new multi year low, & the REIT index dropped 3+ to 316. Junk bond funds were lower & Treasuries were sold. Oil & gold crawled a little higher from depressed levels.
The ECB unveiled a range of measures to tackle
too-low inflation, from a cut in the floor for interest rates to an
expansion of its bond-buying program by at least €360B ($390B). It will extend quantitative easing
by 6 months until at least Mar 2017 at the current rate of €60B a month & broaden the assets purchased to include local & regional debt, ECB pres Mario Draghi said. The
Governing Council reduced its deposit rate by 10 basis points to
minus 0.3%. Investors reacted with skepticism at the scale
of the package. Draghi said the ECB is “willing and able” to
act further if needed. QE is now intended to total at least €1.5T, up from the original €1.1T. “Today’s
decisions were taken in order to secure a return of inflation rates
that are below or close to 2 percent and therefore to anchor medium-term
inflation expectations,” Draghi said. “We are doing more because it works.”
The recovery in the euro area hasn't been rapid
enough to bring inflation back toward the ECB’s definition of price
stability, or annual gains of below but close to 2%. The rate
remained at 0.1% in Nov & the core rate, stripping out the
effect of energy & food-price swings, slipped to 0.9% from 1.1%. The ECB has argued that very low price gains run the risk of
accidentally tipping the economy into deflation. He signaled
more stimulus 6 weeks ago & reiterated his pledge in a Nov 20
speech, when he declared that officials “will do what we must to raise
inflation as quickly as possible” using all available instruments within
their mandate.
He
also said the ECB will reinvest the principal payments on the assets it
purchases under the quantitative easing program. The deposit rate cut will “vastly improve” the transmission of monetary policy, he said.
Janet Yellen delivered a cautiously upbeat
outlook for the US economy, signaling the conditions necessary for an
interest-rate increase have been met & that she hopes to tighten
monetary policy slowly after liftoff. “I currently judge that U.S.
economic growth is likely to be sufficient over the next year or two to
result in further improvement in the labor market,” Yellen said in her testimony. “Ongoing gains in the labor market, coupled with my
judgment that longer-term inflation expectations remain reasonably well
anchored, serve to bolster my confidence in a return of inflation to 2
percent.” Yellen’s comments were nearly identical to portions of a speech she gave yesterday & comes 2
weeks before the FOMC meets. The
group is expected to end an historic era of near-zero interest rates. She noted recent
strong gains in the labor market, including an Oct jobs report that
showed employers added 271K new positions, the most this year, which
pushed unemployment to 5%, down from its peak of 10% in
2009. While signaling confidence on inflation she also
said the FOMC will watch closely for real progress on inflation & for
any signs that inflation expectations are falling. Moving slowly is particularly important when interest rates were so close to zero, she said. “With
the federal funds rate near zero, we can respond more readily to upside
surprises to inflation, economic growth and employment than to downside
shocks,” she added. “This asymmetry suggests that it is appropriate to
be more cautious in raising our target for the federal funds rate than
would be the case if short-term nominal interest rates were appreciably
above zero.”
Applications for unemployment benefits in the US rose last week,
maintaining a see-saw pattern around 4-decade lows that shows
persistent strength in the labor market. Jobless claims climbed 9K to 269K, matching the estimate, according to the Labor
Dept. Filings are hovering just above the
255K level reached in Jul, the lowest since the 1970s. Companies are reluctant to dismiss workers as the labor market
tightens, a development Federal Reserve policy makers are monitoring as
they consider raising their benchmark interest rate. A greater sense of
job security may help Americans feel more comfortable spending during
the holidays, which would provide a much-needed boost to growth. The 4-week average of claims, a less-volatile measure than the
weekly figure, dropped to 269K from 271K the week before. The number continuing to receive jobless benefits rose 6K to 2.16M & the unemployment rate among people eligible for
benefits held at 1.6%, where it’s been since mid-Sep. Jobless claims have been bouncing around historically low levels that
are consistent with robust job growth.
No great surprise, but the markets are taking the prospect of a rate hike hard. It will only be 25 basis points & should be followed by 1 or 2 meetings with no hikes. This will not bend the economy out of shape which has its own problems. Growth has been uneven with average rates around 2%+ . That';s nothing to write home about. The ECB move to add more stimulus is difficult to evaluate, but may not have a major effect, as in the past.
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