Tag: The Federal Reserve

S&P 500: Any Juice Left?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


The S&P 500 (CME:SP500) closed for the week at 2,472.10, after hitting an all-time record, after gaining 10.5% year-to-date. The S&P’s forward Price-to-Earnings ratio, a key ratio for investors, is 17.8 above the 10-year average of 14. And this brings up the inevitable pondering; is there any juice left in the S&P 500?

In searching for an answer, the intuitive starting point might be the S&P’s valuation. We’ve already pointed out that the S&P 500 is trading at a high valuation compared to its 10-year average. Furthermore, according to Factset research, earnings for the 500 companies which comprise the S&P 500 are expected to rise by 9.3% as compared to 9.26% in 2016. Now, while that is a solid figure, it also suggests earnings growth is not accelerating and may even suggest the acceleration in earnings growth is over. And if earnings growth is likely to decelerate in the coming years it cannot account for the S&P500’s 17.8 PE ratio. So, there’s no valid reason why the S&P’s valuation would be the catalyst for another surge. Why not? Simply because it's too high. In fact, the real catalyst isn’t within the S&P500 or even within the stock market; instead, the real reason lies within the Bond market. Continue reading "S&P 500: Any Juice Left?" →

Has Yellen Become A Dove Again?

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Janet Yellen’s equivocal remarks at last week’s semi-annual Congressional testimony certainly might make you believe that a rate hike at the Federal Reserve’s July 25-26 meeting is hardly a sure thing. Indeed, the odds of that happening are a lot less than 50-50. A lot less.

In her testimony, Yellen remained confident in her previous declarations that inflation would gradually rise to the Fed’s 2% target. “It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” she said. But then she quickly hedged her bets. “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent,” she said.

Based on the past several months’ worth of inflation statistics, one would have a tough time arguing that lower-than-expected inflation hasn’t become “persistent.” Last month’s consumer price index was unchanged from May and up only 1.6% versus a year earlier, the fourth straight decline by that measurement. That followed May’s personal-consumption expenditures index, the Fed’s preferred inflation measure, which fell 0.1%. The core index, which excludes food and energy, rose 0.1%, but just 1.4% on a year-to-year basis, well below the Fed’s target rate and lower than at the beginning of the year. Continue reading "Has Yellen Become A Dove Again?" →

Put Your Money Where Your Mouth Is

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Last week Federal Reserve Governor Jerome Powell joined the chorus of prominent industry leaders and government officials calling for reform of the American housing finance system, namely by reducing the government’s role in the business and bringing in more private capital.

Some questioned why Powell should speak on this subject, given that – as he told his American Enterprise Institute audience –the Fed “is not charged with designing or evaluating proposals for housing finance reform.” Still, he pointed out, “we are responsible for regulating and supervising banking institutions to ensure their safety and soundness, and more broadly for the stability of the financial system.” Besides, he noted, he was expressing his own personal views on the subject, not necessarily the Feds.

But what caught the attention of a lot of people, including myself, was the sense of urgency for reform that Powell claimed existed. Continue reading "Put Your Money Where Your Mouth Is" →

Should We Believe The 'Transitory' Story?

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


The bond market may have stopped listening to the Federal Reserve, but that doesn't mean we shouldn't know what the voting members of its monetary policy committee are thinking. What's clear is that they're not as united as they were at their last meeting just two weeks ago, when they voted nearly unanimously to raise interest rates by 25 basis points, with only Minneapolis Fed President Neel Kashkari voting against.

Now, no sooner was the vote cast, but it appears that it at least one member, maybe two, have misgivings about voting for the increase. At the very least, they're not as much in a hurry to raise rates again soon, if not until the end of this year, if not even later.

Still, as you would expect – or hope for – in a body of intelligent people, there's a strong difference of opinion on what the Fed should do next as it concerns interest rates. Continue reading "Should We Believe The 'Transitory' Story?" →

Janet From Another Planet

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


For most of the past 10 years the financial markets have been led if not actually directed by the all-knowing, all-seeing Federal Reserve. But over the past year or so the roles have changed, or at least the markets have basically stopped listening to the Fed.

Case in point: Last week the Fed, largely as expected, voted 8-to-1 to raise short-term interest rates by another 25 basis points; Minneapolis Fed President Neel Kashkari, who wanted to keep rates unchanged, was the lone dissenter. The Fed has now raised its benchmark federal funds rate three times since last December.

Normally, that move should have induced long-term rates – which are set by traders and investors in the bond market, not the Fed – to rise, too. But that hasn’t happened. In fact, long-term rates have gone in the other direction, falling to their lowest levels since last November, to the point where the yield curve – the difference between short-term and long-term rates – has flattened out to a point we haven’t seen in years.

Last week the yield on the U.S. Treasury’s benchmark 10-year note ended at 2.15%, which is down nearly 50 basis points from a recent high of 2.63% three months ago. Over that same period, the yield on the three-month T-bill has risen by about 25 bps, from 0.75% to 1.01%. That means the difference between the two has been cut to about 115 bps from 188 bps in just three months.

Why the disconnect between what the Fed is doing, and thinks is happening, and what the bond market perceives is really happening? Continue reading "Janet From Another Planet" →