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.

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CLF16.NYM...Crude Oil Jan 16...40.42 Up ...0.48 (1.2%)

GCZ15.CMX...Gold Dec 15....1,055.50 Up ...1.30 (0.1%)







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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.

Draghi Lifts QE to at Least 1.5 Trillion Euros to Boost Prices

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.”

Yellen Signals Economy Nearly Ready for First Interest-Rate Hike

 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.

Initial Jobless Claims in U.S. Rose to 269,000 Last Week


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.  

Dow Jones Industrials






 

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