The chances for a fed rate hike this year are looking a lot better following comments from the central bank. The Fed said that “Near-term risks to the economic outlook have diminished”, which leaves the door open for a hike as soon as September. A lot can happen between now and the next Fed meeting, scheduled for September 20-21st, including a lot of new economic data, but the chances for a near term hike look reasonable. The Fed will also hold its annual Jackson Hole retreat in August, when the market should hear a wealth of hints from those in and close to the Fed. In general, the Fed was much more hawkish this month than last, noting that labor markets had “strengthened”.
FINSUM: We have been saying that the Fed was going to get a lot more hawkish and it appears to have happened. Whether they will actually hike in September is a tough call, but assuming economic data stays strong, we think they will, as we imagine they’d like to get one more hike in before the election in order to give themselves room to cut if things turn downward on a Trump victory.
The US pension system has been hanging on by a thread, and now it looks likely to collapse. The system has been underfunded in many areas for years, and now it really looks to be on its last legs. The reason why is terrible returns. Long-term returns for US public pension funds are set to hit their lowest levels ever recorded, creating even more pain for cities and states as the $1 tn funding gap expands. Pensions’ 20-year returns are set to hit just 7.47% once fiscal 2016 results are in, which would be the lowest mark ever recorded. In 2001, at the height of the dotcom boom, the figure hit 12.3%. Pension managers have long said they can make up for a couple of years of bad returns with good long-term performance, so the 20-year return is significant because it shows that returns are actually in systemic decline. With returns so low, the long growing gap might finally need to be addressed as unfunded liabilities are reaching a crushing mass in state and local budgets, such as in Chicago or Connecticut.
FINSUM: The Federal government is probably going to have to step up and address this huge issue. Here is a crazy idea, why doesn’t the Fed shower the US pension system with helicopter money?
Source: Wall Street Journal
This Financial Times article argues that December is the most likely date for the next Fed rate hike. This timeframe is also the market’s consensus and is predicated on the fact that the economy seems to be strengthening, but September feels too soon, and November is hindered by the election, leaving December as a default. In many ways, this path, and markets generally, have mirrored last year’s events. However, in one major way they might be different, according to the piece. That is in Dollar strengthening. Last year the Dollar was on a major bull run, whereas in the past twelve months it has been essentially stagnant. The Fed is now more worried about Dollar strengthening, so the central bank will make sure to keep from talking the Dollar up as it moves towards hiking.
FINSUM: This is pretty plausible actually. The Dollar already seems to be priced with the US as the developed world’s best economy, and a rate hike in the next six months seems to be part of that valuation. If the Dollar doesn’t strengthen much, it will make a rate hike easier for stocks.
Source: Financial Times
Morgan Stanley is warning investors about the oil market. The investment bank says that the crude oil market is about to see a downturn in price. “A refinery-driven correction is upon us”, says the bank. According to Morgan Stanley, the refined products market, such as gasoline, is severely oversupplied and refiners are going to have to cut back on refining in order to maintain profit margins, which would lead to less buying of crude. MS summarizes their view this way, saying “Refineries are the true consumer of crude oil, and crude oil demand is ultimately more important than aggregate refined product demand for oil balances. Given the oversupply in the refined product markets, fading refinery margins, and economic run cuts, we expect crude oil demand to deteriorate further over the coming months”.
FINSUM: We have been noting this for a couple of weeks and the steady downturn in prices seems to be starting, with oil nearly under $43.
Americans have a misguided faith in real estate, says this Barron’s article. People in the US tend to have the view that land and houses are great long-term investments, but in fact, the evidence says otherwise. The article is based on analysis by famed economist Robert Shiller, who argues that despite recent gains, housing has been a disappointing investment. Shiller’s analysis shows a shocking truth, that over the last hundred years home prices in the US have only risen 0.6% per year, adjusted for inflation. As points of comparison, GDP has risen at around 3.2% per year over the same period (starting 1929, when GDP stats began), and stocks have risen in the low double digits.
FINSUM: This is a real eye-opener, as many Americans seem to view their primary and vacation homes as retirement nest eggs. All this said, REITs have done very well recently.
The US and most of the developed world is seeing very little inflation. However, that is not stopping investors from jumping into inflation-linked US bonds, or TIPS. An auction of such securities saw great activity, and primary dealers walked away with their lowest share of the auction in more than a year, as asset managers and foreign central banks snapped up the bonds. The increased demand for TIPS shows that growth is being priced back into the US market, and thus can be taken as a sign of bullishness on the economy. Here is an overview of the situation from a Pimco economic adviser, who said “There are signs of wage inflation, we have seen the end of the big bull run in the dollar, and energy prices have renormalised, which will feed through into headline inflation later this year … Tips offer relatively cheap insurance against upside inflation risks”.
FINSUM: We do know a lot about TIPS, but we think it is an odd time to be buying them given the lack of inflation and better ways to express bullishness. This is an extremely defensive way of expressing bullishness.
Source: Financial Times