(from my colleague Dr. Win Thin) Today’s Fitch downgrade is a stark reminder that Brazil continues to suffer from a toxic mix of high inflation, recession, low commodity prices, and heightened political uncertainty. Because we see no end in sight for these negative factors, we believe Brazil assets will continue to underperform.POLITICAL OUTLOOK The impeachment process has begun, but it is not yet clear whether it can gain enough traction to actually topple President Rousseff. We have...
Read More »Great Graphic: US Bill Yields and Fed Hikes
There are many investors and observers who do not think the Fed ought to raise interest rates today. The Fed's targeted inflation measure, the core PCE deflator, stood at 1.3%, well below the 2% target. They see the fresh sell-off in oil prices and are more concerned disinflation than inflation. Over the past week or so, more concern has been expressed about the sell-off in the high yield bond market. Others are concerned about the strength of the dollar and the weakness abroad. ...
Read More »Fe Fi Fo Fed
The much awaited Fed meeting is here. A 25 bp increase in the Fed funds range to 25-50 bp is widely expected. The near certainty of this contrasts to the high uncertainty of the immediate impact stocks, bonds, and the dollar. There are five components of the Fed's decision that will command attention. First, is the rate move itself. This is the most straightforward for the components. Second is the FOMC statement. The economic assessment is unlikely to change much. Part of the...
Read More »Great Graphic: US Equities in December
This Great Graphic shows how different measures of US equities perform in December by day for the past 20 years. I got it as a tweet from Urban Carmel, who got it from the Stock Almanac. Today is eleventh session of the month. Equities typically rallied starting now in December. Since 1994, the S&P 500 has fallen in the month of December five times (1996, 2002, 2005, 2007, and 2014). Since 1994, seasonally, December is one of the best months for S&P 500 in terms of number...
Read More »Falling Interest Causes Falling Profits
Most people assume that prices move as a result of changes in the money supply. Instead, let’s look at the effect of changes in interest. To start, consider a hamburger restaurant. Suppose that the average profit in the burger business is ten percent of invested capital. If MacDowell’s is thinking about expanding, it has to consider the interest rate. Why? Typically, most of the capital to expand a business is borrowed. MacDowell’s has to borrow the cash to build out its new store. If the...
Read More »While Waiting for the Fed, Don’t Forget Fiscal Policy
The focus of most investors is the rate decision by the Federal Reserve tomorrow. Since the central bank completed its asset purchase program at the end of last year, a rate hike has been understood as a matter of time. Expectations for a June lift-off were dashed by the disappointing economic activity at the start of the year. Officials correctly anticipated the headwinds to be temporary, but expectations for a September hiked were dashed by the heightened volatility seen in August. ...
Read More »Corrective Forces Dominate
The euro made marginal news highs near $1.1060 while sterling and the yen have been confined to yesterday's ranges. European equities are bouncing off ten-week lows. The dollar-bloc is firm; the upbeat RBA meetings provided only a short-lived fillip higher. Oil prices are steady to firmer after yesterday's recovery. Sweden's Riksbank is the first of four major central banks to meet this week. As widely expected, it left its repo rate at minus 35 bp. Less anticipated, it refrained...
Read More »Great Graphic: Large Yuan Devalution in 2016?
Following the mini-devaluation in August, the yuan appreciated in September and October. It began depreciating again in November and this has continued through the first half of December. The dollar finished the local session at new multi-year highs against the yuan. Many observers see in the pre-weekend announcement about monitoring the yuan against a basket an indication of the intentions of officials to push their currency down further against the dollar. We suggest that China...
Read More »Emerging Markets: Week Ahead Preview
(from my colleague Dr. Win Thin) EM starts the FOMC week off on a soft footing. Besides the prospects of Fed liftoff Wednesday, oil prices are making new cycle lows. Uncertainty about China’s FX policy is also making markets nervous, though we think this concern is misplaced. Overall, the global backdrop for EM remains very negative and we do not see much chance for a rebound after Fed lift-off is seen. In recent days, USD has made new all-time highs against COP, MXN, and ZAR. ...
Read More »Outlook for Spain’s Election
Spain goes to the polls on December 20. The country's political and economic dynamics are different than other EMU countries that have held elections this year. The economy is among the strongest performers in eurozone, though unemployment remains stubbornly high. Today is the last day that election polls can be published. El Pais and El Mundo papers published the results of surveys today. They confirm what many have come to expect. The ruling center-right Popular Party will remain...
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