Treasuries rallied last week mostly on the back of the sell-off in equities as well as the Fed’s seeming backpedaling on the timing of rate hikes.
The Fed struck a somewhat more hawkish tone today – certainly enough to spook the markets. Expectations for the first rate hike have shifted forward by nearly a quarter, pointing to late spring of 2015 as the starting point.This monetary stance, combin…
Credit growth in the US seems to have stabilized and may be on the rise. It’s worth mentioning that the bottom in loan growth just happened to correspond to the start of Fed’s taper. Coincidence?
|Total loan growth rate YoY|
Whatever the case, this may be a sign of improving demand for credit and banks’ willingness to accommodate. The key to this change in trend is that improvements in loan growth have been primarily driven by a sudden jump in corporate lending.
|Corporate loan growth rate YoY|
Why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures – as evidenced by firmer capital goods spending by companies. We saw initial signs of that improvement back in February (see story). There were other indications as well. ISI’s latest corporate survey provides further support to this thesis.
ISI Research: – Survey strengthened over the past two weeks with U.S. orders now a solid 61.5. Areas of strength include equipment tied to trucks, rail, aerospace, and construction.
Whether using their massive cash reserves or tapping bank credit facilities (increasing bank loan balances), the time has come for higher capital expenditures by US companies. Here is why.
Barron’s: – Capital expenditures [have been] just 46% of operating cash flow for nonfinancial companies in the S&P 500. The average since 1989 is 57%. Capex can’t remain low forever. Already, the average age of U.S. structures is the highest it has been since 1964. Equipment hasn’t been this old since 1995, and intellectual-property products, like software, since 1983. In a report issued this past week, Bank of America Merrill Lynch predicts U.S. capex growth will more than double over two years, to 5.7% in 2015, from 2.6% last year. Beyond mounting cash and aging plants and equipment, it cites some new factors. Economic growth is picking up, giving business managers more confidence and less spare capacity. Congress even passed a budget this year—one less thing for business leaders to worry about.
Barron’s goes on to say that many shareholders are now pushing firms to increase capital expenditures. Much of the capex spending behavior in the post-recession era has been driven by uncertainty. Recently in the US we’ve had two major sources of such uncertainty: the Fed’s taper and the federal government budget/debt ceiling. Both of these macro risks frightened corporate management enough to hold back on capex. The Fed’s taper however is now on a slow, fairly predictable “autopilot” and as Barron’s points out, the budget deal removed the risk of a near-term federal impasse. As far as corporate CEO’s are concerned, the major uncertainties related to the US federal government have clearly receded – for now.
Thus the similarities in timing of the bottoming of loan growth in the US and the start of Fed’s taper may not be a coincidence after all.
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Expectations of future shortages in quality liquid bonds in US debt markets continue to persist (see story). These shortages however are likely to be more acute for short-term paper. As a percentage of total government debt for example, treasury bills …
Economic indicators continue to point the Fed staying the course with the policy of “small taper” (see post) – a gradual reduction in securities purchases. Behind all the noisy economic data over the past month, one key measure is telling the central b…
The Fed’s “full-allotment overnight reverse repurchase agreement facility” (FRFA) – a mechanism to control short-term rates (see post) – is no longer just an academic exercise.
Since the Fed announced the reduction in securities purchases (“small taper”), the treasury curve has undergone some strange adjustments. Here is what the impact has been since the close on December 17th. Why would the 5-year note sell off the most whi…
As we approach the fifth anniversary of the start of the first quantitative easing program, some are asking the thorny question about the so-called “distributional effects” of these unprecedented programs. Who really benefited since the first QE was launched? There is a great deal of debate on the topic, but here are a couple of facts. Financial asset valuations, particularly in the corporate sector have seen sharp increases. For example the S&P500 index total return (including dividends) has delivered 144% over the 5-year period. Those who had the resources to stay with stock investments were rewarded handsomely.
But what about those who didn’t have such an opportunity? For example savers, particularly retirees who had to stay in cash? They were hurt severely by record low interest rates (negative real rates – see post). And those who had neither the savings nor significant stock investments, relied on house price appreciation or growth in wages. The housing recovery has certainly been helpful (for those who kept their homes), but according to the S&P Case-Shiller Home Price Index, US housing is up less than 5% over the past five years. Not much of a “wealth effect” for those without stock portfolios. And when it comes to wage growth, the situation isn’t much better. The chart below shows hourly earnings growth of private sector employees.
It therefore shouldn’t be a surprise that the three rounds of quantitative easing over the past five years rewarded those who had the wherewithal to hold substantial equity investments. Everyone else on the other hand – which is the majority – was not as fortunate.
Perhaps the best illustration of these distributional effects is in the chart below. It shows the relative performance of luxury goods shares with wealthier clients vs. retail outfits that target the middle class. The benefits of QE are clearly not felt equally by the two groups.
So as we prepare for the Janet Yellen’s ultra-dovish Fed (see story), it’s worth thinking about the past five years and the cost of growing distributional effects in the United States. For now there is plenty more cheap money to help those with large stock portfolios.
JPMorgan: – There are debates about whether a 0% cost of money helps anything except financial asset prices … All we know is that the Fed has a story to tell (“cheap money is good”) and they are sticking to it.
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Market expectations of the first rate hike have once again been pushed out to May of 2015.
The combination of the Fed maintaining its unprecedented monetary easing program at the September meeting as well as the assumption that Janet Yellen will be taking over for Bernanke would suggest that the central bank is farther from any rate adjustment than was expected earlier this year. In fact the market now considers the Fed to be more dovish than the Fed’s own rate forecasts would suggest.
Barclays Research: – Despite stronger than expected data, the market has pushed out hike expectations. … the market is now pricing in the Fed to hike to 0.75% by the end of 2015 vs the Fed’s [own] forecast of 1% and 1.8% by the end of 2016 vs Fed’s forecast of 2%.
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The FOMC’s decision yesterday to continue buying securities at the same pace moved a number of markets. But who exactly benefited from these moves (h/t George H)? Here are a few select markets.Stock investors got a nice boost and precious metals …