The US Dollar and The Interest Rates

   Schwaben Blog

September 25, 2015

Weekly Statistics:

Today Week Ago Year Ago
25-Sep-15 18-Sep-15 25-Sep-14
S&P TSX 13,380 13,646 15,026
S&P 500 1,931 1,958 1,965
DJIA 16,315 16,385 16,945
OIL $45.58 $44.92  $89.37
USD vs CAD 0.7507 0.7604 0.9051
Gold $1,146 $1,138  $1,226

After deciding to keep interest rates steady during the last meeting, the Federal reserve chairperson, Janet Yellen, commented yesterday that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015. She also said that “Prospects for the US economy generally appear solid”. Her comments are supported by this morning’s report from the Commerce department, which states that the US economy grew at an annual rate of 3.9 percent compared to the previous forecast of 3.7 percent. A significant correction in oil prices could also be partially responsible for this stellar growth. This boosted the confidence of investors after the last FOMC meeting gave them some jitters about the growth of the US economy. Most of the major economic indicators are pointing towards a healthy and growing economy, and raising interest rates by 25bps would not prove catastrophic. Although there could  be a short-term correction in equity markets, a hike in interest rates would  signal that the US economy is strong enough to absorb a rate hike after almost a decade, however this does not alleviate the concern of falling inflation especially with a rise in interest rates. A stronger dollar could also  lower inflation as it suppresses import prices. The US dollar index, which measures the performance of US dollar against a basket of six currencies, has significantly appreciated on a year-over-year basis and is almost at the highest level for a decade resulting in disinflation for US consumers.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

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US unemployment at record low – where is inflation ?

Schwaben small S    Schwaben Blog

 

May 24, 2015

 

Weekly Statistics:

 

Today

Week Ago

Year Ago

 

24-July-15

17-July-15

24-July-14

       
S&P TSX

15,108

14,385

14,534

S&P 500

2,122

2,076

 1,885

DJIA

18,272

17,752

16,511

OIL

$59.45

$52.13

 $92.78

USD vs CAD

0.8318

0.7888

0.9072

Gold

$1,225

$1,160

 $1,296

 

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in 41 years, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 26,000 to 255,000 (seasonally adjusted) for the week ended July 18. Initial jobless claims have an importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. As it is evident from the chart below, the data could be volatile but the latest numbers are at historic lows. The four-week moving average of claims, considered a better measure of labor market trends as it excludes the week-to-week volatility , fell 4,000 last week to 278,500. A number below 300,000 is usually considered a threshold associated with strengthening labor market and the jobless claims have stayed below 300,000 for 17 straight weeks. Persistently low layoffs and greater employment gains will help wage gains and likely support consumer spending. At this point the Federal Reserve is still assessing the health of the US economy before deciding when to raise the interest rates. Unemployment numbers and jobless claims play a key factors in the Fed’s decision making process. The Federal Reserve may raise the interest rates in September should employment continue to strengthen and there are signs of wage gains.  This could possibly bring a small correction in equity prices over the short term.

united-states-jobless-claims July 24 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is the Fed finally raising rates ?

Schwaben small S    Schwaben Blog

 

June 19, 2015

 

Weekly Statistics:

 

  Today

Week Ago

Year Ago
  19-June-15 12-June-15

19-June-14

       
S&P TSX

14,653

14,957

14,604

S&P 500

2,110

2,092

 1,951

DJIA

18014

17,849

16,943

OIL

$59.51

$58.42

 $93.92

USD vs CAD

0.8140

0.8017

0.9051

Gold

$1,200

$1,172

 $1,256

 

In a meeting on Wednesday, the United States Federal Reserve decided to keep its benchmark interest rates near zero but central bankers believe improving US economic growth is likely to warrant one or two interest rate increases before the end of the year. The Fed will take many economic indicators into account before raising the interest rates, first time since 2006. The significant correction in oil prices has led to downward pressure on the US inflation rate. The Fed has been insisting that the tumbling inflation rate is largely a temporary result of weak energy prices. The inflation rate was recorded at 0 percent for the month of May after falling to -0.2 percent in the month of April, first time into negative territory since 2009. The core inflation rate (which excludes some volatile price items) came out at 1.7 percent . The US housing market is also showing signs of strength and annual pace of permits for new construction, a sign of future demand, rose 11.8 percent to  1.28 million, the fastest pace since August 2007. Improving labor market, housing starts and slightly increasing inflation will further help the Fed to make its decision sooner rather than later. The Eurozone is already facing muted or negative growth and now with the Greek debt default crisis on the loom, it would be very difficult for them to handle an interest rate increase from the US. In case the Fed decides to raise interest rates during their next meeting in July or September, investors would obviously prefer to invest in “safer” US dollar denominated investments (with a higher yield) than investing in the troubled Euro area. This could further strengthen the USD against many currencies and also virtually push some countries in Eurozone into the recession. The Fed has four meetings left for the year and according to a survey released by the central bank, only 2 out of 17 Fed officials believe that the bank should wait until 2016 to raise the rates. This clearly shows the increased confidence of the Fed officials in the US economy and now the question remains if they are going to raise interest rates once or twice this year?

US Inflation June 19, 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

US economy stronger than expected but what does this mean for inflation and interest rates ?

Schwaben small S                            Schwaben Blog

 

May 15, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago

15-May-15

08-May-15

16-May-14

S&P TSX

15,108

15,170

14,534

S&P 500

2,122

2,116

 1,885

DJIA

18,272

18,191

16,511

OIL

$59.45

$59.45

 $92.78

USD vs CAD

0.8318

0.8265

0.9072

Gold

$1,225

$1,188

 $1,296

The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 1,000 to 264,000 (seasonally adjusted) for the week ended May 9. Initial jobless claims have importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. Economists polled by Reuters had forecasted claims rising to 275,000 last week. As it is evident from the image below, the data could be volatile but the latest numbers are still near historic lows. A number below 300,00 is usually considered a threshold associated with strengthening labor market. The four-week moving average of claims, considered a better measure of labor market trends as it churns out the week-to-week volatility , fell 7,750 last week to 271,750. This was the lowest level since April 2000. Persistently low firings and greater employment gains should help a gain in wages and support consumer spending. The Federal reserve is still assessing the health of US economy before deciding when to raise the interest rates and unemployment numbers and jobless claims play a key role in that. Now that it’s almost certain that the Fed is not raising rates in June, majority of financial commentators are placing their bets on a rate hike in September. While US economy has overall shown signs of strength, flat retails sales and very low inflation rate could still make Fed to wait a little longer before finally raising interest rates.

US Jobless Claims May 15, 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Markets stronger than expected before weekend

   Schwaben very small S                                         Schwaben Blog

 

May 8, 2015

 

 

Weekly Statistics:

Today

Week Ago Year Ago
08-May-15 01-May-15

09-May-14

S&P TSX

15,170

15,339

14,534

S&P 500

2,116

2,108

 1,878

DJIA

18,191

18,024

16,583

OIL

$59.45

$59.26

 $91.07

USD vs CAD

0.8265

0.8222

0.9072

Gold

$1,188

$1,177

 $1,304

On Friday morning European markets surged about 2.5% on the conservative victory in England starting markets on a good note that continued in North America after the job market in US has rebounded on employment gains for the month of March. The employers added 223,000 new positions in April compared to a gain of 85,000 in March (initially reported as 126,000). Economists were expecting a gain for 224,000. The majority  of gains came from professional and business services (added 62,000 jobs), health care (added 45,000 jobs) and construction (added 45,000). The average hourly earnings for employees rose by 0.1% and have now grown by 2.2% in the last twelve months. This was below the economist’s estimate of 0.2%. The unemployment rate moved down to 5.4% and is closer to Fed’s expectation of “full employment”, which it pegs around 5.2%. This is the lowest unemployment rate since 2008. Michael Dolega, senior economist at TD Economics, said “The report was more or less a Goldilocks one, healthy enough to assuage fears that an abrupt slowdown in the US economy is upon us, but not strong enough to bring forward the Fed hike meaningfully”. The labor participation rate remained virtually unchanged at 62.8%, up 0.1% from participation rate. Over the last twelve months, it has stayed within a range of 62.7% and 62.9%, still near the lowest level since the late 1970s. Many economists now think that the first-quarter woes were temporary and the economy will rebound this spring, as it did last year from a first-quarter contraction. While the increasing gains in job numbers point towards the strengthening US economy but the slow growth in hourly wages paints a different picture. This absence of wage pressure will keep the Fed from raising the rates in June and it led to a rally in equity markets with all the major indices up more than 1%. While the Fed may not hike interest rates in June, a September rate hike is still on the table and this will be the first rate hike since 2006.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Is the US slowing or is it just a strong dollar ?

Schwaben S

Schwaben Blog

 

May 1, 2015

 

Weekly Statistics:

Today Week Ago Year Ago
01-May-15 24-Apr-15

02-May-14

S&P TSX

15,339

15,408

14,765

S&P 500

2,108

2,118

 1,881

DJIA

18,024

18,080

16,512

OIL

$59.26

$57.40

 $90.86

USD vs CAD

0.8222

0.8207

0.9072

Gold

$1,177

$1,180

 $1,304

 

The US economy stalled in the first quarter with Gross Domestic Product (GDP) increasing at an annual rate of only 0.2%. That was a big drop from last quarter’s 2.2% growth and the weakest growth in last one year. A survey of 86 economists by Bloomberg had a median forecast of economic growth of 1%.   While harsh weather dampened the consumer spending, it was a stronger dollar that further weakened the economic growth. The dollar’s more than 4.5% gain against US’s main trade partners in the first quarter led to in an increase in trade deficit from $471.4 Billion to $522.1 Billion. This subtracted 1.25% points from the first quarter growth. What many economists and analysts have not considered though is that a rise in U$ against other currencies will suppress reported earnings of foreign subsidiaries and hence understate the “real” operating earnings that companies have earned. In other words lower corporate earnings are a result of currency losses rather than lower corporate earnings. Diane Swonk, chief economist at Mesirow Financial in Chicago said, “ The US economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising the interest rates”.  The Fed officials met on Wednesday and noted for the fist time that non-energy imports were keeping inflation below its target of 2%, which indirectly implies the impact of a stronger dollar. The Fed clearly stated its intention to be data-driven while deciding for hiking the interest rates. This will be the first time since 2006, if the Fed decides to raise the interest rates. It means that from now on rates could be hiked in any of the Fed’s meeting. During previous meetings of the Fed, financial commentators and economists interpreted that interest rates could be increased in June or September but with the recent announcement, Fed has cleared the rumours regarding rate hike.

Meanwhile the US job markets showed signs of improvement as the wages for private sector employees increased by 0.7% in the first quarter and were up 2.8% in the last twelve months. This is the biggest gain in more than six years. The Labor department also reported that the number of claims for job less benefits fell to the lowest level since 2000. The number was 262,000 versus a consensus estimate of 290,000, well below the 300,000 mark that economists have been using as a benchmark. While this shows that the US economy is improving well but the slow growth in GDP tells a different story. This confused sentiment has led to an increased volatility in equity markets and fear amongst investors.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Is China finally driving Global Capital Markets ?

    Schwaben Blog

 

April 17, 2015

 

 

Weekly Statistics:

Today

Week Ago Year Ago
10-Apr-15 02-Apr-15

17-Apr-14

S&P TSX

15,360

15,388

14,500

S&P 500

2,081

2,102

 1,864

DJIA

17,826

18,057

16,408

OIL

$56.14

$51.70

 $93.09

USD vs CAD

0.8178

0.7946

0.9072

Gold

$1,203

$1,208

 $1,296

Global markets saw a selloff on Friday, driven by concerns over Greek’s possible exit from Euro, crackdown on margin lending in China and subpar US corporate earnings. Yields on 10-year German government bonds hit a record low of 0.07% as investors tried to move from equities to bonds. This led to a fall in European markets with Germany’s DAX loosing 2.6% and France’s CAC 40 loosing 1.6%. According to major strategists in Europe, Greece is making little progress in negotiating its debt with it’s international creditors and that could lead it to defaulting on its debt or even exiting the euro.  Athens’ main stock exchange lost around 2.5% and has declined more than 40% over the last 12 months, making it one of the world’s worst performing indices. Greece needs to pay its civil employees and pensioners at the end of this month and as the date comes closer they are tapping all the remaining cash reserves across the public sector (pension funds and regional administrations)- a total of $2 Billion Euros.  A senior Greek finance ministry official said that ” This is the last bit of cash that Greek state has”. Greece’s remaining time with euro could be decided on Saturday during their meeting with their lenders.

The Chinese securities regulator warned against excessive borrowing in Chinese markets and imposed sanctions on margin borrowing in order to control margin trading. This led to a 5%decline of  Chinese equity markets in post-close trading, which further brought the negative sentiment to Europe and North America. Margin borrowing has been a major driver of China’s stock market run and Chinese shares have hit 7 year highs after seven weeks of gain. Their main index SCH COMP has almost doubled over the last 12 months and is up almost 70% this year. The Chinese regulator also allowed fund managers to lend stocks for short selling to increase the supply of shares. This led to a fear of sell-off among investors as Chinese markets have had an enormous run over the last 12 months. The world’s second largest economy has a significant impact over the global sentiment and if Chinese markets lost 5% then this could lead to a global sell-off next week.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Interest rates and oil price volatility are still a big concern !

March 27, 2015

 

 

Weekly Statistics:

Today

Week Ago

Year Ago

27-Mar-15

20-Mar-15

28-Mar-14

S&P TSX

14,812

14,942.41

14,260

S&P 500

2,061

2,108

 1,849

DJIA

17713

18,128

16,264

OIL

$48.34

$45.53

 $91.03

USD vs CAD

0.7937

0.7929

0.9041

Gold

$1,198

$1,182

 $1,298

Federal Reserve Chair Janet Yellen said that interest rates could possibly increase in 2015 and made the case that the Fed would be cautious and subsequent rate hikes would be gradual. In a speech in San Francisco on Friday, she emphasized that the coming tightening cycle will be unlike any other in recent times, as the U.S. economy continues to heal from the worst recession since the Great Depression. She emphasized that it’s the expected path of short-term interest rates that matters and not the precise timing, when asked about when the Fed will finally raise interest rates for the first time in nine years. Meanwhile investors are selling US equities at a record pace and making investments in European assets while speculating that the interest rates in US will increase by this year, sooner rather than later. The US stock funds have seen an outflow of $44 Billion in the year-to-date period for their worst start to the year since 2009.  On he other hand, European equity funds have enjoyed an inflow of $46.6 Billion so far in 2015. A stronger Dollar and increasing probability of interest rate hike in US are probably the main reason for this movement of funds. Ahead of the start of the earnings season, about 84% of the companies that have provided first quarter outlook gave negative outlooks. Many companies blamed strengthening dollar or weak commodities or both for poor outlooks. This outlook is more than 81% of the companies that warned in Q1 2014 and the five-year average of 68%.

Last week was very volatile for crude oil. Oil prices gained around 15% in the first four trading sessions of the week but lost 6% on Friday. Recently there have been news of disturbances in Yemen and that drove the prices up. Yemen is the 39th biggest oil producer in the world and produces roughly 130,000 barrels of crude oil a day. But its not the amount of oil produced by Yemen which has shot up the prices, rather its the geographic importance of Yemen in the transportation of crude oil across different nations. Its sits at Bab-el-Mandab Strait, a key choke point in international shipping. About 3.8 million barrels of oil a day passed through this strait in 2013 and a closure would keep tankers away from reaching Suez canal and SUMED pipeline.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

US economy running at full steam – maybe the end of interest rate declines and a bumpy road for Equities for the next few weeks ?

March 6, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago

06-Mar-15

28-Feb-15

07-Mar-14

S&P TSX

14,952.50 15,234.34

14,299.08

S&P 500

2,071.26 2,105  1,878.04

DJIA

17,856.78 18,133

16,452.72

OIL

$49.78 $49.52

 $91.66

USD vs CAD

0.7945 0.7991

0.9022

Gold

$1,168

$1,214

 $1,341.50

The US economy added a robust 295,000 jobs in February, taking the country’s unemployment rate to lowest level in about 7 years. The median forecast in a Bloomberg survey of economists expected an increase of about 235,000. The unemployment level dropped to 5.5% from 5.7%, best since May 2008- Pre recessionary levels. Economists are now of the opinion that US economy could grow at 3% annual growth for the first time in a decade. This jobs report clearly points towards an improving and growing US economy, which is good news for equity markets. But, the increased confidence in US economy also led markets to speculate about a rate hike from Federal Reserve sooner rather than later. This in turn led to a sharp decline in equity markets with major indices like Dow Jones, S&P 500 and TSX down by about 1.5%. The Fed has always maintained that it would not rush into increasing the borrowing costs but financial commentators are of the opinion that a rate cut could be possible in mid 2015. Though the US economy has been posting solid gains in unemployment numbers, the wages of US workers are not raising as fast. The hourly wages rose at 0.1% or 3 cents to $24.78- a disappointment after an increase of 0.5% in January.

Meanwhile, the Canadian dollar sank after Canada reported its second highest trade deficit on record in January as the nation had to account for a slump in prices of oil shipments. According to Statistics Canada, the deficit widened to $2.45 Billion, doubling from a revised trade gap of $1.22 Billion in December. Economists had projected a deficit of $1 Billion. The loonie fell by almost half a cent to 79.48 USD. Total exports fell 2.8% in January, the biggest monthly decline in more than a year, while the imports were largely unchanged from December. As we discussed in our previous newsletter, the plunge in oil prices could reverse the fortunes of Canadian provinces. While Alberta has to bear the falling prices of crude oil, Ontario could benefit from a lower loonie which could give a boost to the province’s manufacturing industry.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch