Friday, April 5, 2019


After whiplash of a turnaround in most markets, Canada TSX up by 13.3% and US by 11.2%, the watch phrase today is “sit, wait and watch” which is what the US federal reserve is doing. That of course leads most other governments to stop talking about raising interest rates and even thinking about cutting it.

It is always dangerous to talk about “it is different this time” in stock market investing but that seems to be what is being discounted now. After decades of declining rates, we had an impatient outlook that the drop is over, and it must be time for rising rates. Surely how much lower can it go? Many countries in Europe and Japan are lending money at zero, even negative interest rates. This hasn’t really happened before. We are in uncharted territory.

This disparity of what our linear thinking suggests versus what is happening is because of an economy which has some with more money than they need while others with barely enough for retirement. Higher rates help those who have savings but not those who need money. This will only change slowly as the big cohort of baby boomers age and slowly pass their wealth to the next generation. Hard to put an estimate on how long this lasts but surely it will be decades rather than years. So, we watch and wait before the return of what we know from previous market movements. One economist believes requirement for more mechanical stuff which used to be a major source of industrial growth may be waning as we spend more time on our desks.
Bonds which pay virtually nothing here and negative returns in some economies have proven to still be a stabilizing asset. A balanced portfolio was much less volatile during the December rout. A 2% return is better than losing value. Desire for extra return or yield will add more volatility than in the past.
All isn’t negative. A slower growing economy may mean shallower recessions when it comes. We are in the “lower for longer” regime again. Other than increasing our fixed income portion of our assets, we are not changing our strategy.

A quote from National Bank Financial latest report, 4 April 2019.

"... temporary employment ─ which, like the yield curve, is a decent leading indicator ─ even registered a quarterly decline in Q1. The other report, the household survey, showed a large drop in employment driven by cuts in full-time positions. And with full-timers often better remunerated than part-timers, one should not be too surprised by the moderation in wage inflation, the latter dropping in March to 3.2% on a year-on-year basis. The only reason the unemployment rate managed to stay unchanged at 3.8% (despite sizable job losses in the household survey) was the drop in labour force participation. All told, there are reasons for the Federal Reserve to be cautious and remain in pause mode for a while. " 

Why is inflation so low?

U.S. Watch By Krishen Rangasamy, NBIN

 U.S. employment costs are on the rise thanks to a tight labour market. Latest data from the Bureau of Labor Statistics indeed showed the employment cost index (ECI) rising 2.8% year-on-year in Q1, close to the cycle high reached the prior quarter. But higher employment costs are not translating into surging U.S. inflation, the annual core PCE inflation rate falling to 1.7% in the first quarter, well below the Fed’s 2% target. So why is inflation so low?

 It’s not because of the services sector whose PCE deflator has been rising at a roughly similar pace to its ECI in the last 15 years. As today’s Hot Charts show, it’s the goods sector that’s not converting rising employment costs into higher goods price inflation. In fact, despite goods sector ECI rising 2.4% year-onyear in Q1, the goods PCE deflator fell during the quarter and on a year-on-year basis.

And here, blame the strong U.S. dollar which is keeping import prices under wraps. Goods producers are more subject to global competition than their counterparts in the services industry and they seem to prefer absorbing the higher costs instead of passing them on to consumers and risk losing market share to cheaper imports.