Author Archive

  • Janet Yellen’s Testimony
    , February 10th, 2016 at 9:32 am

    Here’s the text of what Janet Yellen will be saying later this morning on Capitol Hill:

    Chairman Hensarling, Ranking Member Waters, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. In my remarks today, I will discuss the current economic situation and outlook before turning to monetary policy.

    Current Economic Situation and Outlook

    Since my appearance before this Committee last July, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation is expected to remain low in the near term, in part because of the further declines in energy prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its 2 percent objective over the medium term.

    In the labor market, the number of nonfarm payroll jobs rose 2.7 million in 2015, and posted a further gain of 150,000 in January of this year. The cumulative increase in employment since its trough in early 2010, is now more than 13 million jobs. Meanwhile, the unemployment rate fell to 4.9 percent in January, 0.8 percentage point below its level a year ago and in line with the median of FOMC participants’ most recent estimates of its longer-run normal level. Other measures of labor market conditions have also shown solid improvement, with noticeable declines over the past year in the number of individuals who want and are available to work but have not actively searched recently, and in the number of people who are working part time but would rather work full time. However, these measures remain above the levels seen prior to the recession, suggesting that some slack in labor markets remains. Thus, while labor market conditions have improved substantially, there is still room for further sustainable improvement.

    The strong gains in the job market last year were accompanied by a continued moderate expansion in economic activity. U.S. real gross domestic product is estimated to have increased about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment. Although private domestic final demand appears to have slowed somewhat in the fourth quarter, it has continued to advance. Household spending has been supported by steady job gains and solid growth in real disposable income–aided in part by the declines in oil prices. One area of particular strength has been purchases of cars and light trucks; sales of these vehicles in 2015, reached their highest level ever. In the drilling and mining sector, lower oil prices have caused companies to slash jobs and sharply cut capital outlays, but in most other sectors, business investment rose over the second half of last year. And homebuilding activity has continued to move up, on balance, although the level of new construction remains well below the longer-run levels implied by demographic trends.

    Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen.

    As is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.

    Of course, economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost U.S. economic growth more than we expect. At present, the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the labor market and inflation and the balance of risks to the outlook.

    As I noted earlier, inflation continues to run below the Committee’s 2 percent objective. Overall consumer prices, as measured by the price index for personal consumption expenditures, increased just 1/2 percent over the 12 months of 2015. To a large extent, the low average pace of inflation last year can be traced to the earlier steep declines in oil prices and in the prices of other imported goods. And, given the recent further declines in the prices of oil and other commodities, as well as the further appreciation of the dollar, the Committee expects inflation to remain low in the near term. However, once oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wane, and as the labor market strengthens further, inflation is expected to rise gradually to 2 percent over the medium term. In light of the current shortfall of inflation from 2 percent, the Committee is carefully monitoring actual and expected progress toward its inflation goal.

    Of course, inflation expectations play an important role in the inflation process, and the Committee’s confidence in the inflation outlook depends importantly on the degree to which longer-run inflation expectations remain well anchored. It is worth noting, in this regard, that market-based measures of inflation compensation have moved down to historically low levels; our analysis suggests that changes in risk and liquidity premiums over the past year and a half contributed significantly to these declines. Some survey measures of longer-run inflation expectations are also at the low end of their recent ranges; overall, however, they have been reasonably stable.

    Monetary Policy

    Turning to monetary policy, the FOMC conducts policy to promote maximum employment and price stability, as required by our statutory mandate from the Congress. Last March, the Committee stated that it would be appropriate to raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2 percent objective over the medium term. In December, the Committee judged that these two criteria had been satisfied and decided to raise the target range for the federal funds rate 1/4 percentage point, to between 1/4 and 1/2 percent. This increase marked the end of a seven-year period during which the federal funds rate was held near zero. The Committee did not adjust the target range in January.

    The decision in December to raise the federal funds rate reflected the Committee’s assessment that, even after a modest reduction in policy accommodation, economic activity would continue to expand at a moderate pace and labor market indicators would continue to strengthen. Although inflation was running below the Committee’s longer-run objective, the FOMC judged that much of the softness in inflation was attributable to transitory factors that are likely to abate over time, and that diminishing slack in labor and product markets would help move inflation toward 2 percent. In addition, the Committee recognized that it takes time for monetary policy actions to affect economic conditions. If the FOMC delayed the start of policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective. Such an abrupt tightening could increase the risk of pushing the economy into recession.

    It is important to note that even after this increase, the stance of monetary policy remains accommodative. The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. In addition, the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run. This expectation is consistent with the view that the neutral nominal federal funds rate–defined as the value of the federal funds rate that would be neither expansionary nor contractionary if the economy was operating near potential–is currently low by historical standards and is likely to rise only gradually over time. The low level of the neutral federal funds rate may be partially attributable to a range of persistent economic headwinds–such as limited access to credit for some borrowers, weak growth abroad, and a significant appreciation of the dollar–that have weighed on aggregate demand.

    Of course, monetary policy is by no means on a preset course. The actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation. In doing so, we will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In particular, stronger growth or a more rapid increase in inflation than the Committee currently anticipates would suggest that the neutral federal funds rate was rising more quickly than expected, making it appropriate to raise the federal funds rate more quickly as well. Conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with the attainment of our objectives over time.

    Consistent with its previous communications, the Federal Reserve used interest on excess reserves (IOER) and overnight reverse repurchase (RRP) operations to move the federal funds rate into the new target range. The adjustment to the IOER rate has been particularly important in raising the federal funds rate and short-term interest rates more generally in an environment of abundant bank reserves. Meanwhile, overnight RRP operations complement the IOER rate by establishing a soft floor on money market interest rates. The IOER rate and the overnight RRP operations allowed the FOMC to control the federal funds rate effectively without having to first shrink its balance sheet by selling a large part of its holdings of longer-term securities. The Committee judged that removing monetary policy accommodation by the traditional approach of raising short-term interest rates is preferable to selling longer-term assets because such sales could be difficult to calibrate and could generate unexpected financial market reactions.

    The Committee is continuing its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. As highlighted in the December statement, the FOMC anticipates continuing this policy “until normalization of the level of the federal funds rate is well under way.” Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and reduce the risk that we might need to return the federal funds rate target to the effective lower bound in response to future adverse shocks.

    Thank you. I would be pleased to take your questions.

  • Morning News: February 10, 2016
    , February 10th, 2016 at 7:10 am

    Lagarde Says Ukraine Must Reform or Risk IMF Program Failing

    Banks Lead European Stock Gains as Credit Risk Eases, Oil Rises

    Iran to Purchase Sukhoi-30 Fighter Jets From Russia

    U.S. Stocks Fight to a Draw, Look to Yellen Testimony

    Deutsche Bank’s CoCo Payments Hinge on Obscure Accounting Metric

    SoftBank Operating Profit Rises as Son Sees Sprint Revival

    Chinese Group Bids $1.2 Billion for Company Behind Opera Web Browser

    BP CEO `Very Bearish’ on Oil as Storage Tanks Are Filling Up

    ’Star Wars’ Sales Propel Disney Earnings, But ESPN Slips

    Goodyear Reports 4Q on Hefty Charge

    Asahi Is Bidding to Buy Peroni and Grolsch Beers From SABMiller

    Taming Drug Prices by Pulling Back the Curtain Online

    Monsanto to Pay $80 Million to Settle Charge of Improper Accounting

    Cullen Roche: Fiscal Policy Has Failed the U.S. Economy

    Roger Nusbaum: A Mostly Positive (?) Jobs Report Can’t Help Markets

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  • Sinking Small Caps
    , February 9th, 2016 at 11:52 am

    Here’s a look at the relative strength of the small-cap sector. This is an interesting sector to watch for a few reasons.

    For one, the sector is skewed toward domestic manufacturers. As a result, it’s a good way to see the impact of the U.S. dollar on equities.

    Also, small-caps had a long 15-year run of outperforming the market (1999 to 2014). That’s quite impressive. Of course, you don’t know when the cycle is over until after the fact.

    I’m sure many investors thought the relative strength line would make a run at its February 2014 high. It hasn’t yet. Instead, the line has gone down, down and down. It really started to crumble after last June. I think it’s safe to say that this is a new cycle of small-cap underperformance.

    The little stocks just ain’t popular.

    sc02092016

  • Spotting a Bear
    , February 9th, 2016 at 11:17 am

    At U.S. News and World Report, Simon Constable writes on how to spot a bear market:

    If stocks are in a bear market, the last thing investors need is to hear about it after the fact. It’s as unhelpful as being told, “You should have been here yesterday.”

    The pullback in the Standard & Poor’s 500 index hasn’t yet reached the classic definition of a bear market, which is a decline of 20 percent or more. But by that measure, the drop is nearly here.

    Are we headed for a bear market, and what should investors do? The answers are tricky.

    Watch the bond market. “They just don’t announce bear markets,” says Eddy Elfenbein, who writes the Crossing Wall Street financial blog. But there are methods of detection.

    Elfenbein says it’s a harbinger of a bear market when interest rates on two-year government securities are higher than those on 10-year Treasuries. That differential in interest rates encourages investors to pull their money from long-term investments, such as 10-year Treasuries and stocks, and instead earn better yields for a short-term investment in the two-year bonds.

    “We are nowhere near that now,” he says. Two-year treasuries yield around 0.74 percent, versus 10-year notes that yield 1.87 percent. Longer-term investments, like stocks, still make sense.

    While he doesn’t see a bear market now, Elfenbein says he likes to keep a famous and sobering investing quote from ace stock picker Peter Lynch in mind: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

  • Morning News: February 9, 2016
    , February 9th, 2016 at 7:05 am

    Britain’s Global Banking Hub Is Mostly Leery of an E.U. Exit

    Global Bond Rally Near `Panic’ Level With Japan Yield Below Zero

    Bonds Follow Bank of Japan Into Negative Territory

    Russian Companies Rush to Return to Post-Sanctions Iran

    Oil Supply Seen Outpacing Demand, Capping Price

    Gold Weekly: Should You Join The Party?

    Amazon Is Building Global Delivery Business to Take On Alibaba

    Google CEO Pichai Receives Record $199 Million Stock Grant

    Viacom To Sell Snapchat Ads In Multiyear Deal

    CVS Health Meets 4Q Profit Forecasts

    Geithner Gets JPMorgan Credit Line to Invest With Warburg Pincus

    Sears Hometown Indicates That Sears Brand Name Could Be Worthless

    Zenefits CEO Parker Conrad Resigns Amid Scandal

    Howard Lindzon: Cash is King…and What Were The Signs of the Top?

    Joshua Brown: Now We Separate the Pros From the Pretenders

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  • The S&P 500 Drops 1.42%
    , February 8th, 2016 at 9:49 pm

    Today was a rotten day for the stock market, and an afternoon rally saved it from being even more rotten. The S&P 500 lost 1.42% on the day although at its lowest, the index was off by 2.74%.

    big02082016

    The Energy sector was the only sector to close in the green but that was by just 0.07%. Oil crossed above $30p per barrel. The big loser was the Materials sector which lost 2.71%. The Financials lost 2.64%. Many of the big banks did especially poorly today as a number of them hit their lowest point in more than two years. Citigroup and Bank of America were both off by more than 5%, and Morgan Stanley lost nearly 7%.

    The pain in the big banks is being caused by an emerging banking mess in Europe. Several banks there have some bum energy loans so they need to ditch assets to raise capital. Deutsche Bank is going for about 30% of its book value.

    The recent low for the S&P 500 came on January 20. Today’s low is still above that low, but the small-cap Russell 2000 did make a new two-and-a-half-year low.

    The bond market did very well today. The 10-year yield dropped below 1.75%. The yield is near its low from almost exactly one year ago. The bond market has been creaming stocks over the last six weeks.

  • Cognizant Earned 80 Cents per Share for Q4
    , February 8th, 2016 at 7:24 am

    This morning, Cognizant Technology Solutions (CTSH) reported Q4 earnings of 80 cents per share which was two cents more than expectations. The company had previously said it expected earnings of at least 77 cents per share. Quarterly revenue rose 17.9% to $3.23 billion.

    “We are pleased with our strong performance in 2015,” said Francisco D’Souza, CEO. “At a time when major technology shifts are disrupting all industries, clients are looking to a partner like Cognizant to work with them to create the winning business models of tomorrow at the intersection of the physical and digital worlds. Our investments in disruptive technologies, new business models and best-in-class delivery uniquely position us to enable clients to drive digital transformation at enterprise scale.”

    For the year, Cognizant made $3.07 per share. Revenue rose 21.0% to $12.42 billion. A year ago, their initial guidance for 2015 was for earnings of at least $2.91 per share and revenue of at least $12.21 billion. Overall, 2015 was a very good year for CTSH.

    Now for guidance. This is their first look at 2016. Cognizant sees Q1 earnings between 78 and 80 cents per share. For the year, CTSH expects earnings to range between $3.32 and $3.44 per share. That’s very light. In Friday’s newsletter, I said I was looking for something around $3.45 per share. Don’t worry. I think the company is lowballing expectations so they can raise them later on.

    Cognizant expects Q1 revenue between $3.18 billion and $3.24 billion, and full-year revenue between $13.65 billion and $14.20 billion.

    Update: CTSH is trading about 7% lower this morning.

  • Morning News: February 8, 2016
    , February 8th, 2016 at 7:01 am

    Oil Falls With Equities as Venezuela Tour Doesn’t Deliver Deal

    China’s Foreign-Exchange Reserves Decline to $3.23 Trillion

    National Bank Takes $119 Million Writedown on Maple Bank Inquiry

    Yellen to Balance Confidence With Caution in Testimony

    A Dying Breed: Currency Traders Are Left Out of New Wall Street

    Net Neutrality Again Puts F.C.C. General Counsel at Center Stage

    VW Plans to Make U.S. Diesel Owners an Offer They Can’t Refuse

    LeapFrog to Be Acquired by VTech in Shake-Up for Toy Industry

    EU Approves Schlumberger’s Cameron Takeover

    U.N. Agency Seeks to End Rift on New Aircraft Emission Rules

    Credit Suisse C.E.O. Asks for a Cut in His Bonus

    Peyton Manning Just Gave Budweiser $3.2 Million in Free Ad Time

    Bridgewater Executives Deny Report of Rift at the Hedge Fund

    Jeff Miller: Is a Recession Looming?

    Jeff Carter: Real Time Settlement, A Unique Piece of The BlockChain

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  • The Weakness in Semiconductors
    , February 5th, 2016 at 8:44 pm

  • January NFP +151K, Unemployment 4.9%
    , February 5th, 2016 at 8:30 am

    The February jobs report is out. Last month, the U.S. economy created 151,000 net new jobs. That’s not very strong. The unemployment rate dropped to 4.9%. That’s an eight-year low.

    NFP growth has gradually decelerated for the last year.