Speech of the Day
Financial Review by Sinclair Noe for 09-24-2015
DOW – 75 = 16,201
SPX – 6 = 1932
NAS – 18 = 4734
10 YR YLD – .02 = 2.12%
OIL + .43 = 44.91
GOLD + 23.80 = 1155.10
SILV + .36 = 15.25
Pope Francis addressed a joint meeting of Congress this morning. Francis urged the United States not to turn its back on undocumented immigrants, to reject the victimization of religious and ethnic minorities, to overcome income inequality and to save the planet from climate change, citing Scripture and the nation’s founding ideals. He also asked lawmakers to wage a constant battle against poverty and to ensure the wealth of the world is equitably shared and used to create jobs. It was really a very remarkable and beautifully crafted speech. I’m posting a link to the full text of the speech on by blog, and I would hope that you have a chance to hear or read the entire speech because it covers some of the most important issues of our time. You may be in total agreement with Francis or you might disagree with some parts, but make no mistake – this was a strong and moving address from one of the most influential people in the world. After the speech, Francis went from some of the most powerful people to some of the least powerful as he had a humble lunch with homeless people. The Pope has flown to New York, where he will deliver another speech tomorrow before the United Nations General Assembly.
Chinese president Xi Jingping will be in Washington this evening for a state dinner at the White House. Xi’s first stop in the US was in Seattle where he met with some of his big corporate customers. Xi signed a deal for $38 billion worth of jets from Boeing. Then Cisco announced it is forming a joint venture with server maker Inspur to sell networking and cloud computing products in China, where the company faces political pressure and declining sales. Microsoft is partnering with Baidu and Tsinghua Unigroup to sell cloud services to Chinese state-owned enterprises and also struck a deal with China Electronics Technology Group to explore ways to deploy a “localized” version of Windows 10.
Fed Chair Janet Yellen delivered a speech this afternoon on “inflation dynamics and monetary policy” at the University of Massachusetts. The Fed held off on a rate hike last week; however, today Yellen seemed to be priming the markets for a hike in the near future, saying: “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.”
In today’s speech, Yellen also echoed Fed vice chair Stanley Fischer, who in August suggested that the Fed could move to tighten monetary policy before inflation had moved all the way back to the Fed’s target. Yellen said: “Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”
The Fed, of course has a dual mandate of maximum employment and price stability. On those points, it is hard to argue that we have achieved maximum employment when there is so much slack remaining in the labor market and no signs of wage push inflation; in terms of price stability, we have seen no signs of inflation, which must drive some economists crazy. The conventional wisdom is that if interest rates are too low, we will see an increase in inflation; conversely, if rates are too high, it will serve to put the brakes on the economy and inflation will fall and perhaps turn into disinflation or even deflation. The strange part is that rates have been at historically low levels, and inflation just hasn’t happened; in fact, there’s been a little disinflation. The economists and pundits that called for hyperinflation were gob smacked. The biggest proponents of higher rates are the big banks, because they make money on the difference between the interest rates they receive on loans and the rate they pay on deposits; and right now they have trouble justifying the interest they charge on loans when rates are this low, so they have tended to be more stringent in their lending requirements, and have even started charging to hold deposits. The banks spread, or net interest margin has dropped under a Zero interest rate policy.
And so it’s interesting that several Fed policymakers are calling to raise rates, even though the World Bank and the IMF and many economists cite the risk of higher rates; not just a risk to emerging markets but the domestic economy as well. That still seems a greater risk than the lag time of raising rates.
Brazil’s central bank intervened to try to calm the country’s volatile forex market yesterday, using currency-swap contracts and auctions of dollar-repurchase agreements to prop up the real. Over the past year, the currency has lost about 70% of its value against the dollar due to a struggling economy and corruption scandal at Petrobras that may see the state intervene with a bailout. Earlier this month, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status.
Purchases of new homes jumped in August to a seven-year high. Sales climbed 5.7 percent to a 552,000 annualized pace, up from a 522,000 rate in July that was stronger than initially reported. Steady job gains and cheaper borrowing costs are bolstering demand for new homes, particularly as the supply of previously owned properties is still scant.
Orders for durable goods in August fell for the first time in three months, mainly because of an expected pullback in bookings for new cars, airplanes and military hardware. Overall business investment also softened. Orders for U.S.-made durable goods such as autos, appliances and heavy machinery fell a seasonally adjusted 2% last month. That’s the first decline since May and follows two big increases in a row. Setting aside autos and aircraft, new orders for long-lasting U.S. goods were flat.
New applications for U.S. unemployment benefits inched up by 3,000 to 267,000 in the seven days ended Sept. 19. This is the 29th straight week claims have come in under 300,000, an unofficial threshold of a firming labor market.
The report on jobless claims came out just before Caterpillar said it plans to cut 10,000 jobs by the end of 2018 as part of a restructuring program. The company is aiming to save $1.5 billion annually through measures that include layoffs of 4,000 to 5,000 people by the end of 2016 and plant closures. The company is lowering its outlook for 2015 sales and revenue by $1 billion to $48 billion, and expects 2016 sales and revenue to be about 5% lower than 2015. Shares have lost 23% in the year so far, while the Dow Jones Industrial Average is down 8.7%.
General Electric said it would create 1,000 new energy-sector jobs in the U.K., after reaching an agreement to access export financing for up to $12 billion with the U.K. export credit agency. The company said the new jobs will support orders it has won, and expect to win, in international markets including Brazil, Ghana, India and Mozambique. Last week, GE said it was moving 500 American jobs overseas, after Congress failed to reauthorize the U.S. Export Import Bank.
The CEO is gone, but the problems at Volkswagen are not going away anytime soon. The automaker is facing billions of dollars in fines, millions in recalls, broken consumer trust and more executives that are likely to follow Martin Winterkorn out the door. Volkswagen has not named a CEO successor.
Volkswagen’s diesel emissions scandal may threaten the future of diesel-powered vehicles, along with their clean air and fuel economy reputation. Although diesel cars are fairly rare in the U.S., they are mainstream in Europe, with cheap fuel as the major selling point. In 2014, diesel motors powered 40% of passenger cars on the road in Europe, and diesel cars comprised 53% of all new auto sales in the region. Are BMW’s emission tests tainted too? A report this morning in Auto Bild suggests BMW’s X3 exceeds nitrogen oxide levels by more than 11x.
Traders following the moves of bond king Bill Gross would likely be surprised to see the results marking the first anniversary of his dramatic career move. Investors who put money into his new Unconstrained Bond Fund at Janus Capital are sitting on a 2.5% loss, while those who stayed in Pimco’s Total Return fund are up 1.7%. The diverging performances could explain another surprise: Although the outflows from Total Return were indeed huge – $120 billion and counting – barely $1 billion flowed into Gross’s new fund at Janus.
Facebook has introduced a 360-degree “spherical” video feature in its newsfeed, allowing users to drag a cursor or tilt their devices to replicate an immersive panoramic view as the video plays. The move takes Facebook closer to the virtual reality experience, and may be the first step toward integrating content with the Oculus Rift headset (scheduled to be released next year).