THE “NEW AND IMPROVED†FORWARD GUIDANCE
With the new vague guidelines for forward guidance including just about everything except the kitchen sink, the Fed can do just about anything with rates, including raising them sooner than most investors and FOMC members anticipate. (BMO Capital Markets)
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Yellen Debut Rattles Markets Wary Investors Seize on New Fed Chief’s Mixed Message on Pace of Rate Increases
In a press conference after the meeting, Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends—a conclusion that could come this fall. She offered that projection with many caveats, but some investors took it as a sign that the Fed could start raising interest rates sooner than expected. (…)
The Fed took several actions at the meeting. First, it pulled back to $55 billion from $65 billion its monthly bond-buying program, which is aimed at holding down long-term interest rates in hopes of boosting spending, hiring and growth. It was the third reduction in the bond purchases since December.
The central bank also rewrote its guidance about the likely path of short-term interest rates, putting less weight on the unemployment rate as a signpost for when rate increases will start. It said instead that the Fed would look at a broad range of economic indicators in deciding when to start raising short-term rates from near zero, where they have been since December 2008.
(…) the Fed’s official policy statement included a new line noting that officials expect to keep rates lower than normal even after inflation and employment return to their longer-run trends. (…)
Ms. Yellen acknowledged that officials might have been too optimistic about the economic outlook early in the year. But she and other officials largely stuck to their projections for how growth and inflation will unfold in the coming years.
Fed officials see inflation slowly returning from nearly 1% recently to 2% in the years ahead and the economy reaching a growth rate around 3% or a little less. They reduced their estimates for the unemployment rate, which they see falling to between 6.1% and 6.3% by year-end, from 6.7% in February. They attributed recent sluggishness in growth in part to “adverse weather conditions.” (…)
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Yellen muddies Fed’s message Slips from Janet Yellen unsettled markets but may not mean much
(…) “It’s hard to define but, you know, it probably means something on the order of around six months or that type of thing,†she said. “What the statement is saying is it depends what conditions are like.â€
For the financial markets, it did not matter what it depended on. They had heard six months. Add six months on to this October, when the Fed is likely to end its asset purchases, and – depending on the timing of Fed meetings – you get to March or April 2015. That is some months earlier than the Fed had been expected to raise rates.
In a matter of seconds, the S&P 500 shed about 1 per cent and yields on Treasury securities soared. If Ms Yellen did not already realise the awesome power of her every word as Fed chair, she does now. (…)
It was an unfortunate slip, however, because it was the one solid moment in a muddy set of Fed communications. (…)
The vagueness of the statement meant that markets naturally looked towards the FOMC’s interest rate forecasts for a better idea of where the Fed is going. Those were hawkish, showing that the median Fed official expects an interest rate of 1 per cent by the end of 2015, up from 0.75 per cent before.
But Ms Yellen said to disregard the forecasts. (…)
From this morass, it is still possible to work out roughly what Ms Yellen meant. (…)
(…) Yields on two-year Treasury notes climbed as much as 10 basis points yesterday, the most since June 2011.
“With the shift to qualitative guidance, the only quantitative metric we have is the fed funds projections from the Fed,†said Dean Maki, chief U.S. economist for Barclays Plc in New York and formerly an economist at the central bank. “So while the statement and Chair Yellen in the press conference said little had changed, the Fed’s projections suggested that there was a notable change in the Fed’s outlook.â€
Summarizing Yellen’s First (Disastrous) Press Conference
“Miss me yet?”
To me, here’s the most important from yesterday’s FOMC statement:
the Fed’s official policy statement included a new line noting that officials expect to keep rates lower than normal even after inflation and employment return to their longer-run trends.
Bearish stuff!
BANKING ON BANKERS?
A less-dovish than expected Janet Yellen on Wednesday and a more-dovish than expected Stephen Poloz on Tuesday have a) thrashed the C$ to below 89 cents, and b) pulled Canadian 5-year bond yields in line with their U.S. counterparts for the first time in years. With Canadian overnight rates well above the fed funds rate since 2010, most short-term Canadian bond yields have been stuck above U.S. levels. However, with the market now looking for Fed rate hikes in 2015, possibly early in the year, and some pushing further out BOC rate hikes, 5-year yields have met in the middle. That’s a big development.
With Chair Yellen not ruling out a possible rate increase “around six months†after the end of QE (putting it in Q2 2015), and Governor Poloz not ruling out a possible rate cut, the loonie is flying straight into some pretty stiff headwinds. (BMO)
Add the China slowdown, weakening commodity prices…and if oil prices turn south, the loonie will drown.
Goldman Cuts Its Outlook For China
The bank lowered its 2014 forecast to 7.3 percent from 7.6 percent late Wednesday. It also cut its 2015 outlook to 7.6 percent from 7.8 percent.
“Both trade and consumption – factors that we had expected to provide positive support to growth this year – disappointed in the first two months of 2014, relating to the anti-corruption efforts, which affected consumption, and the soft DM (developed market) recovery,” economists led by Li Cui, managing director, China Macro Research at the bank wrote in a note.
While Goldman forecasts 7.3 percent growth in the first quarter, it doesn’t expect the economy to slow much further beyond this level for the remainder of the year. It sees growth at 7.5 percent, 7.3 percent and 7.2 percent for the second, third and fourth quarters, respectively.
U.S. Work Hours Should Defrost Soon
The recent sag in U.S. weekly work hours has raised a few eyebrows, as the index is unchanged in the past six months, the weakest showing since the early days of the recovery. Blame Mother Nature. Average weekly hours worked plunged 1.7% annualized from September to February, led by construction (-5.5%) and retail (-3.1%), two areas greatly affected by the nasty weather. Meantime, despite recent softness, private-sector payrolls still rose a decent 1.9% (or more than 2 million at an annual rate). Look for hours worked to accelerate in the spring, supporting income and spending.
Let’s hope BMO Capital’s economists prove right. Weather or not, construction and retail were also greatly affected by rising interest rates and housing prices and very slow growth in real disposable income.
The latest confidence survey of the heads of Corporate America, as measured by Business Roundtable, was encouraging. The Economic Outlook Survey rose for the second consecutive quarter in Q1, climbing to a 2-year high of 92.1. Although sales expectations for the next six months slipped a bit, anticipated capital spending jumped again, this time up 9 pts in the quarter, while expected hiring also increased but at a more moderate pace. (BMO)
Yuan Falls Farther, but Ride May Be Nearly Over China’s yuan hit its lowest point in more than a year, but analysts say Beijing—having slowed hot-money inflows—is unlikely to allow much more depreciation in the near term.
(…) It has fallen every day since China widened the currency’s daily trading range over the weekend, losing 1.3% of its value against the dollar—increasing the loss for 2014 to 2.8%, nearly wiping off the entire 2013 gain of 2.9%. In Shanghai trading Thursday morning, the yuan fell to an intraday low of 6.2334 to the dollar—its lowest level since late February 2013. (…)
Beef And Hog Prices Surge
The current outbreak of PEDV (porcine epidemic diarrhea virus) in North America is having a huge impact on hog prices. The disease, which poses no risk to food safety but is lethal to piglets, is estimated to have caused the loss of up to 5 million animals over the past year, or around 4-5% of annual slaughter. Even without PEDV, hog markets were set to tighten significantly this year as lower feed prices spur herd expansion and limit the supply of animals available for slaughter. As a result, inflation-adjusted hog prices have soared to their highest level since the early 1990s (and to record highs in nominal terms). However, markets appear to be anticipating a relatively short-lived disruption—the futures curve peaks in June at 133¢/lb and falls back to 87¢ in December. (BMO)
The Problem With Forward P/E’s
(…) Beginning in the late 90’s, as the Wall Street casino opened its doors to the mass retail public, use of forward operating earning estimates to justify extremely overvalued markets came into vogue. However, the problem with forward operating earning estimates is that they are historically wrong by an average of 33%. The chart below, courtesy of Ed Yardeni, shows this clearly.
Let’s take this exercise one step further and consider the historical overstatement average of 33%. However, let’s be generous and assume that estimates are only overstated by just 15%. Currently, S&P is estimating that earnings for the broad market index will be, as stated above, $120.34 per share in 2014 but will rise by 14% in 2015 to $137.36 per share. If we reduce both of these numbers by just 15% to account for overly optimistic assumptions, then the undervaluation story becomes much less evident. Assuming that the price of the market remains constant the current P/FE ratios rise to 18.08x for 2014 and 15.84x for 2015. (…)
Lastly, with corporate profits at record levels relative to economic growth, it is likely that the current robust expectations for continued double digit margin expansions will likely turn out to be somewhat disappointing. (…)
Slumping Fertility Rates in Developing Countries Spark Labor Worries Thailand is one of the pockets of the developing world to see sharp declines in fertility rates, bringing concerns about shrinking labor pools and aging populations.
Birthrates have fallen in Thailand in recent years, making it one of the poorest countries facing the prospect of shrinking labor pools and an aging population. Such problems, while familiar in Europe and Japan, used to be unheard of in the up-and-coming economies of Southeast Asia.
Thailand’s fertility rate has fallen to an average of just 1.6 children per woman, from seven in the 1970s, disrupting centuries of tradition in which children care for their parents. That is forcing political leaders to look for new sources of economic growth and community leaders to search for ways to make the elderly more self-sufficient. (…)
Other pockets of the developing world also have seen sharp declines in fertility rates, including Brazil, Mexico and parts of India and Southeast Asia. Rising prosperity appears to be one catalyst. If the trend continues, the United Nations projects—in its “low-growth” forecast—that the global population will hit 8.3 billion in 2050 before declining to less than the current level of 7.2 billion by 2100. (Its “mid-growth” forecast projects 10.85 billion by century’s end.) (…)
Demographers such as Michael Teitelbaum at Harvard Law School and Jay Winter, a history professor at Yale University, note that already more than half the world’s population lives in aging countries where the fertility rate is less than 2.1 children per woman—the rate required to replace both parents, once infant mortality is taken into account.
This is both an opportunity and a threat. On one hand, it could help preserve natural resources in nations that have been taxed by rapid population growth. But some economists blame a slowdown in population growth for contributing to such disparate events as the Great Depression and Japan’s sluggish growth rates in recent decades. (…)
China saw its working-age population decline by 3.45 million in 2012 and 2.45 million last year—a cumulative decline of 0.63% since 2011 and a sign that expansion has ended. (…)
Fertility rates rise and fall. The improving economy in the U.S. helped stabilize fertility rates in 2012 at 1.9 after four years of declines, according to the National Center for Health Statistics. When immigration is taken into account, the U.S. population still is growing. (…)
