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The week of 18 August– 24 August 2016
Volume 28 Number 01
A.2. International Perspectives
New York
New York Federal Reserve
President William Dudley, a
permanent voting member of
the FOMC, said a few days
ago that a Sep rate hike “is
possible”. He said that his
views have not changed much
and growth in the second
half of 2016 will be stronger
than the first half. Dudley
also said that the US labour
market continues to generate
reasonable job gains. Overall,
the US economy is getting
closer to the point “
where
it’ll be appropriate to raise
interest rates further
”. The
various Fed members have
said differing and often
confusing things in the past.
Should we listen to Dudley
now ?
First, as
i
Capital shared
earlier, almost all US
economic indicators have
been painting a rosy picture of
the US economy. This trend
has been continuing. Even
the supposed weak Jul retail
sales were not that weak.
So, in terms of economic
figures, the macro backdrop is
supportive of another rate hike
soon. When that happens,
how will the NYSE and
NASDAQ react ?
Figure 1
is very
interesting.
It shows the S&P 500 from
its 2009 lows. It also shows
the core consumer price index
which has been trending
upwards recently and was
never in deflation territory,
even during the depths of the
US-led global crisis. Then,
the almost zero federal funds
target rate is shown at the
bottom.
In looking at figure 1, there
are a few obvious questions
and conclusions. One obvious
conclusion is that the S&P 500
has greatly benefitted from
the very prolonged loose US
monetary policy. The second
obvious conclusion is that the
core consumer price index is
very far from the almost zero
federal funds target rate. The
third obvious conclusion is that
the almost zero federal funds
target rate has hardly budged.
From these obvious
conclusions, there are some
obvious questions. The US
core consumer price index can
drop to deflationary territory
or the almost zero federal
funds target rate has to rise.
Therefore, the first obvious
question is this : with the US
economy creating a healthy
rate of jobs, with her wages
and inflation rate trending
upwards, can the almost
zero federal funds target rate
still stay so low ? Two, can
the almost 8-year old rally
on the NYSE and NASDAQ
continue when the almost
zero federal funds target rate
starts to move up decisively
? A corollary question would
be, have the NYSE and
NASDAQ already reached
bubbly levels ?
While there are a few
obvious questions and
conclusions, there are also
a few obvious answers.
The first obvious answer is
that no stock market rally
lasts forever and there are
signs that the NYSE and
NASDAQ are already richly
valued and are already near
bubbly levels. The second
obvious answer is that no
central bank can afford an
almost zero interest rate
monetary policy when the
labour market is near full
employment, when wages
and inflation are trending
upwards and when the risks
of financial instability are
rising substantially. This
leaves us with the one most
important question to answer
- when will the ageing rallies
on the NYSE and NASDAQ
end.
With the 2016 US
presidential election coming
to an end, we reckon that
there are no more reasons
for the Federal Reserve to
keep deferring the rate hikes.
If this is the case, then, the
almost 8-year rally is near
its end. For now,
i
Capital
is maintaining its bearish
short-term
outlook of the
NYSE with a range of 1,650
– 2,200 for the S&P 500. See
Stop Press for the latest. For
now,
i
Capital is retaining its
bearish target of 1,350 for the
medium-term
.
i
Capital will
review its
long-term
outlook
of the NYSE at a later stage.
The US core
consumer
price index
can drop to
deflationary
territory or the
almost zero
federal funds
target rate has
to rise.
“
Figure 1 S&P500, Federal Funds Target Rate and Core CPI
Source: www.shutterstock.com
No central bank can afford an almost zero interest rate monetary policy
when the labour market is near full employment, when wages and inflation
are trending upwards and when the risks of financial instability are rising
substantially. Janet Yellen needs to take away the punch bowl before
everyone is drunk.
A
| Market Opinion
from the previous month,
as a result of a sharp
increase in the production
of capital goods as
well as durable and
non-durable consumer
goods – see
table 27.
On a year-on-year basis,
industrial production grew
0.4% in Jun – see
figure
27.
Industrial production
for all major countries
remained in negative
territory on a month-
on-month basis, with
Germany being an
Source: flickr.William Murphy
The right or the wrong message from the Europeans to the Europeans ?
FROM PAGE 9
exception – see
table 28
.
Going forward, industrial
production is expected to
remain weak due to the
fragile global economic
conditions.
Table 27 Industrial Production
%change frompriormonth
%change fromprior year
May 2016 Jun 2016 May 2016 Jun 2016
Total
-1.2
0.6
0.3
0.4
Intermediate goods
-0.3
-0.2
0.8
0.4
Energy
-2.6
-0.6
-1.2
-3.5
Capital goods
-2.3
1.3
-0.4
1.1
Durable consumer goods
-1.5
1.0
-0.7
0.9
Non-durable consumer goods
-0.4
0.7
0.5
0.9
Source: Eurostat
Table 28 Industrial Production by Country
% change from prior month % change from prior year
May 2016
Jun 2016 May 2016
Jun 2016
Germany
-1.1
1.0
-0.3
0.7
France
-0.5
-0.8
0.7
-1.4
Spain
-0.6
-0.1
1.1
0.3
Italy
-0.6
-0.4
-0.6
-1.0
Source: Eurostat
Figure 27 Industrial Production
10
Capital Dynamics Sdn Bhd