The December meeting was again slated to be 'the one', as in the meeting where interest rate policy changed for the first time in a decade and almost exactly seven years after the fed funds rate was cut to just over zero. And it finally happened. The target fed funds rate has moved from 0.00-0.25% to 0.25-0.50%, so the equivalent of a quarter-percent move.Read Entire Article Here
The H Group Blog
Investment and Financial Planning news from some of the best in the business.
What’s going on with the high yield bond market?
The short answer: nothing we haven’t already known, but it’s reminder about how niche markets such as high yield work. For perspective’s sake, the market is just over $1 trillion in size, which is a fraction of the $70 tril. global equity market footprint, so conditions can get stranger here and more quickly.Read Entire Article Here
- Economic data for the week was led by a marginal showing in retail sales, a drop in consumer and business sentiment, as well as continued impacts of disinflationary impulses in import prices and PPI.
- Global equity markets fell dramatically on the week with continued concern over the impact of falling crude oil prices. Bonds fared well during the week, as interest rates declined.
- Economic data again showed some mixed results, with manufacturing (and some services results for that matter) coming in weaker than expected, while the monthly employment situation report for November came in strong. The labor report was seen as raising the chances for a Fed interest rate hike in December.
- U.S. large cap stocks experienced a slightly positive week, while small caps and foreign equities lost ground—even despite a fall-off in the dollar which helped foreign returns. Interest rates ticked upward as chances of Fed action in Dec. remained high, but not dramatically so. Most commodity groups gained a few percent, except for crude oil, which saw declines yet again.
- In a short holiday week, economic data was mixed, with durable goods and housing statistics generally higher, while consumer confidence indicators fell for the month.
- Markets experienced a typical tame holiday week, with U.S. large-cap stocks coming in flat, small caps doing a bit better, and foreign stocks mixed. Bonds earned small gains with interest rates declining in the middle portion of the yield curve. Commodities were also flattish on net, with oil ending the week close to where it started, but gold continued its recent declines.
Where are we at this stage of the economic recovery?
That is a more difficult question to answer than it first appears. Traditionally, we have thought of the business cycle in a formulaic way. The usual progression is: prior recession ends as negative sentiment troughs at unsustainably low levels; then, as prior imbalances and excesses are worked off, business activity finally picks up from these low/underutilized levels. As growth expands, employment and spending expand as well, in a snowball effect of positive momentum. Eventually, the cycle matures and the easy growth becomes more difficult to come by. At that point, you begin to see firms stretch for growth by adding leverage/debt and engaging in more speculative activities such as synergistic (at first), then less-well-planned M&A activity since there is lessened risk of doing so when the economy is moving in a positive direction. High levels of growth can mask a lot of missteps. But, at some point, these excesses grow too large and overwhelm the system, meaning fragility has expanded to the point where a there are much smaller buffers to defend against smaller and smaller shocks. A tipping point of stress occurs which snowballs in a negative direction, with credit contraction, job losses and slowing growth to the point of recession. This has been the pattern for centuries.Read Entire Article Here
- Economic data last week was generally sub-par, led by below-expected results in manufacturing, housing and industrial data; on the other hand, the index of leading economic indicators turned around with positive results.
- Equity markets around the globe were sharply higher, with the U.S. leading the way with few specific catalysts but perhaps more Fed policy certainty. Bonds moved slightly higher domestically, while foreign debt results were mixed along with a stronger dollar. Non-oil commodities such as industrial metals and natural gas provided the volatility in that segment for the week, as crude oil traded within a fairly tight range.
- In a light week for economic data, retail sales disappointed somewhat while consumer sentiment and jobs/claims data remained strong. Producer prices fell, especially on a year-to-year basis, which continues to reflect non-inflationary pressures throughout the system.
- Equity markets fell back sharply on the week due to a number of economic and earnings-related factors. Bonds fared slightly positively in the risk-off environment, as interest rates generally fell, with foreign issues outperforming domestic. Crude oil prices declined dramatically, back towards $40/barrel upon ongoing supply concerns.
- Economic data came in a bit better than expected on average, with the ISM non-manufacturing index and the October employment report surpassing expectations. Conditions were less appealing on the manufacturing side, as ISM manufacturing, factory orders and related data continued to show some softness.
- Domestic equity markets rose on expectations of a solid jobs report, while foreign equities generally lost ground with some negative impact from a stronger dollar. Bonds fell back on rising interest rates, with corporates outperforming longer-term government debt. Commodities, including crude oil, experienced weakness, due to dollar effects and lack of any positive catalysts.
Will we ever see inflation again? Where’s all this deflation coming from?
We would say be careful what you wish for, but like anything else in the economic realm, each of these conditions offers a double-edged sword.
Inflation, of course, is the general rising of prices. While everyone wants their wages to increase, this is not as useful if coupled with or surpassed by price increases in everyday goods, from groceries to gasoline—such impacts can cause ‘real’ (after-inflation) wage increases to net out to zero, or even fall behind if goods inflation is high or unpredictable enough. Economists and central bankers generally are of the belief that ‘some’ inflation (1-2% per year or so) is beneficial—mostly due to the fact that some manageable degree of price growth is a positive byproduct of economic growth, and growth is a desired thing. Too much inflation is naturally problematic, destabilizing and difficult to combat (U.S. in 1970s-early 1980s, Germany after WWI, some emerging market nations in various years), but finding that sweet spot of ‘just enough’ can be a tricky policy balance.Read Entire Article Here
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