AMERIPRISE FINANCIAL, INC.
Should the Fed Raise Rates? Hawks and Doves Still Divided
09/08/2015 | David Joy
Prior to its release last Friday, the August labor report was viewed as being particularly influential, as the last significant data point before the Federal Reserve convenes on September 16 to consider when to raise interest rates. However, despite being generally solid, the report was ambiguous enough that it likely resolved little, and leaves the outcome of next week's meeting as uncertain as before.
The hawkish camp on rates can point to the drop in the unemployment rate to 5.1 percent, the lowest rate in seven years. It can also point to the upward revision of 44,000 new jobs added to the prior two month total, as well as the uptick in average hourly wages. The dove camp, however, can point to the relatively light total of 175,000 new jobs created in August, well below the 250,000 average of the prior three months, even though the August report is historically subject to large upward revisions, averaging 77,000 in the past five years.
On balance, markets viewed the jobs report as modestly increasing the odds of a September rate increase. U.S. equities stumbled following the report, closing down 1.5 percent on the day and down 3.4 percent for the week. It was the third weekly decline in the last five, and leaves the S&P 500 8.7 percent lower since China devalued its currency on August 10, and 9.8 percent below its May 21 high. And there have been few places to hide during the past few weeks. Every sector within the S&P 500 is lower. Consumer stocks have held up the best, although they too are down by almost 7 percent since the selling began in earnest on August 19. The worst performers have been financials, down 10.4 percent, and utilities, down 10.3 percent.
Europe, Asia Grapple with Economic Data
Eurozone equities also closed sharply lower last week, as the Stoxx 50 index fell 3.2 percent. It was the third decline in the past four weeks, and leaves it 13.5 percent lower since the yuan devaluation and 16.6 percent below its April 13 peak. The European Central Bank did provide some support by indicating its openness to extending its quantitative easing program beyond its stated September 2016 end date, and on Tuesday of this week second quarter GDP within the Eurozone was revised upward, bringing the year-over-year growth rate to 1.5 percent, up from the previous estimate of 1.2 percent. Eurozone equities have responded favorably to these two developments and have moved higher to begin the week.
Emerging markets remained mired in a period of extended weakness. The MSCI Emerging Markets index lost another 2.5 percent on the week, its twelfth weekly decline in the past fifteen. The index has fallen 19.5 percent since its peak on April 27. The MSCI Emerging Markets Asia Index, meanwhile, is down 22 percent since the April peak.
Chinese markets were closed last Thursday and Friday, providing global investors with a respite from the downside volatility, however briefly. Markets did open on Monday and promptly resumed their slide. The Shanghai Composite fell 2.5 percent to start the week, before climbing almost 3 percent on Tuesday, and has now plunged 39 percent since its June peak. Over the weekend, in an impressive display of clairvoyance, the head of China's central bank said the decline in stocks there was almost over. Of course, it helps one's predictive powers if the outcome can be engineered through intervention. More importantly for China this week is a series of economic reports that will provide the latest snapshot on the pace of activity in August. First up were the trade figures, which showed a sharp deceleration in exports, while imports declined less than expected. Consumer prices and money supply growth follow later in the week, while next week brings reports on retail sales, industrial production, and fixed investment. Signs of further erosion, and by extension continued pressure on China's major trading partners, especially among developing economies, will certainly impact the Fed's deliberations next week.
Bond yields showed little movement last week in comparison to the weakness in equities. The yield on the two-year Treasury note rose two basis points to 0.71 percent, while the yield on the ten-year note fell four basis points to 2.12 percent. Lower quality bond yields fell last week, continuing their descent of the past two weeks after having risen steadily since April. The Bank of America Merrill Lynch High Yield Master II index yield fell nine basis points to 7.53 percent. On August 24 its yield was 7.82, after having climbed from 6.34 percent in April. During that time its spread versus Treasuries gapped upward from 450 basis points to 615. Since then it has retreated modestly back down to 574 basis points, but still exhibiting an elevated level of stress.
All Eyes on the Fed
Now that Labor Day has come and gone, all eyes will turn to the Fed. Whether it raises rates next week will likely hinge on the question of how concerned it is about the growth slowdown in China and its effect on global activity and developing economies in particular. On the basis of domestic conditions alone, the Fed can make a case for liftoff. But the possibility of renewed dollar strength and capital flight from developing markets may give the Fed pause.
After a weak second quarter in which, according to Factset, earnings declined year-over-year for the first time in three years and revenues posted consecutive quarterly declines for the first time since 2009, third quarter estimates are projecting further declines in both. Earnings are not expected to grow until the fourth quarter and revenues not until the first quarter of next year. To paraphrase Burt Bacharach: "What the world needs now is growth, sweet growth / it's the only thing that there's just too little of…"
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. It consists of the following emerging market country indices: China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China's Shanghai Stock Exchange.
Bank of America/Merrill Lynch High Yield Master II is an index of high-yield corporate bonds which measures the broad high yield market..
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
09/08/2015 | David Joy
Prior to its release last Friday, the August labor report was viewed as being particularly influential, as the last significant data point before the Federal Reserve convenes on September 16 to consider when to raise interest rates. However, despite being generally solid, the report was ambiguous enough that it likely resolved little, and leaves the outcome of next week's meeting as uncertain as before.
The hawkish camp on rates can point to the drop in the unemployment rate to 5.1 percent, the lowest rate in seven years. It can also point to the upward revision of 44,000 new jobs added to the prior two month total, as well as the uptick in average hourly wages. The dove camp, however, can point to the relatively light total of 175,000 new jobs created in August, well below the 250,000 average of the prior three months, even though the August report is historically subject to large upward revisions, averaging 77,000 in the past five years.
On balance, markets viewed the jobs report as modestly increasing the odds of a September rate increase. U.S. equities stumbled following the report, closing down 1.5 percent on the day and down 3.4 percent for the week. It was the third weekly decline in the last five, and leaves the S&P 500 8.7 percent lower since China devalued its currency on August 10, and 9.8 percent below its May 21 high. And there have been few places to hide during the past few weeks. Every sector within the S&P 500 is lower. Consumer stocks have held up the best, although they too are down by almost 7 percent since the selling began in earnest on August 19. The worst performers have been financials, down 10.4 percent, and utilities, down 10.3 percent.
Europe, Asia Grapple with Economic Data
Eurozone equities also closed sharply lower last week, as the Stoxx 50 index fell 3.2 percent. It was the third decline in the past four weeks, and leaves it 13.5 percent lower since the yuan devaluation and 16.6 percent below its April 13 peak. The European Central Bank did provide some support by indicating its openness to extending its quantitative easing program beyond its stated September 2016 end date, and on Tuesday of this week second quarter GDP within the Eurozone was revised upward, bringing the year-over-year growth rate to 1.5 percent, up from the previous estimate of 1.2 percent. Eurozone equities have responded favorably to these two developments and have moved higher to begin the week.
Emerging markets remained mired in a period of extended weakness. The MSCI Emerging Markets index lost another 2.5 percent on the week, its twelfth weekly decline in the past fifteen. The index has fallen 19.5 percent since its peak on April 27. The MSCI Emerging Markets Asia Index, meanwhile, is down 22 percent since the April peak.
Chinese markets were closed last Thursday and Friday, providing global investors with a respite from the downside volatility, however briefly. Markets did open on Monday and promptly resumed their slide. The Shanghai Composite fell 2.5 percent to start the week, before climbing almost 3 percent on Tuesday, and has now plunged 39 percent since its June peak. Over the weekend, in an impressive display of clairvoyance, the head of China's central bank said the decline in stocks there was almost over. Of course, it helps one's predictive powers if the outcome can be engineered through intervention. More importantly for China this week is a series of economic reports that will provide the latest snapshot on the pace of activity in August. First up were the trade figures, which showed a sharp deceleration in exports, while imports declined less than expected. Consumer prices and money supply growth follow later in the week, while next week brings reports on retail sales, industrial production, and fixed investment. Signs of further erosion, and by extension continued pressure on China's major trading partners, especially among developing economies, will certainly impact the Fed's deliberations next week.
Bond yields showed little movement last week in comparison to the weakness in equities. The yield on the two-year Treasury note rose two basis points to 0.71 percent, while the yield on the ten-year note fell four basis points to 2.12 percent. Lower quality bond yields fell last week, continuing their descent of the past two weeks after having risen steadily since April. The Bank of America Merrill Lynch High Yield Master II index yield fell nine basis points to 7.53 percent. On August 24 its yield was 7.82, after having climbed from 6.34 percent in April. During that time its spread versus Treasuries gapped upward from 450 basis points to 615. Since then it has retreated modestly back down to 574 basis points, but still exhibiting an elevated level of stress.
All Eyes on the Fed
Now that Labor Day has come and gone, all eyes will turn to the Fed. Whether it raises rates next week will likely hinge on the question of how concerned it is about the growth slowdown in China and its effect on global activity and developing economies in particular. On the basis of domestic conditions alone, the Fed can make a case for liftoff. But the possibility of renewed dollar strength and capital flight from developing markets may give the Fed pause.
After a weak second quarter in which, according to Factset, earnings declined year-over-year for the first time in three years and revenues posted consecutive quarterly declines for the first time since 2009, third quarter estimates are projecting further declines in both. Earnings are not expected to grow until the fourth quarter and revenues not until the first quarter of next year. To paraphrase Burt Bacharach: "What the world needs now is growth, sweet growth / it's the only thing that there's just too little of…"
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. It consists of the following emerging market country indices: China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China's Shanghai Stock Exchange.
Bank of America/Merrill Lynch High Yield Master II is an index of high-yield corporate bonds which measures the broad high yield market..
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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