Central Banks struggle to make sense of it all. The big three (The Fed, the European Central Bank or ECB and the Bank of Japan) released minutes last week. Japan’s QE is equivalent to 15% of GDP. Even QE3 in the US rarely exceeded 6%, but it at least moved the economy forward. The Japanese economy is stuck at around 0.9% growth. So they left rates at 0.1%.
The ECB minutes lamented that “slack was very difficult to measure and was subject to a high degree of uncertainty” and that its €60bn a month QE was “feeding only very slowly into higher demand”. That’s bank speak for “it’s not really working and it’s not really big enough but let’s keep going”.
The Fed minutes showed a split board but with nerves showing. The data since the meeting (so some producer prices and last week’s payrolls) have weakened the hawks’ hands (talons?) and the fed futures market did not react. That leaves December a more likely time to raise than later this month. One reason the pressure may be off is because of this:
Real rates have increased in recent weeks to around 2.1% from 0.9% a year ago. So the real cost of borrowing has risen.
So what does all this mean? Cheap money looks like it’s here for a while longer.
The Earnings Season
Alcoa kicked off the season and threw the kitchen sink at its earnings. China, commodity pricing and global demand were all reasons for a $60m loss compared to a $245m profit a year ago. It’s going to be the same story for many large company earners. Remember overseas markets account for 40% of S&P 500 companies’ sales, compared to around 13% for the economy as whole. So, we may hear the global demand and strong dollar explanation a lot.
Bottom Line: we may hit a tough patch in the next few weeks. The market is nervous. But looking to year’s end, we like US stocks. Testing times. But patience usually works.
Christian Thwaites
--Brouwer & Janachowski, LLC
Please note that the discussion of the investments and investment strategy of Brouwer & Janachowski, LLC (“Advisor”) (including Advisor’s research and investment process) represent the investments and investment strategy of Advisor at the date of this commentary, and are subject to change without notice. Advisor cannot assure that the type of investments mentioned in this commentary will outperform any other investment strategy in the future, nor can it guarantee that such investments will present the best or an attractive risk-adjusted investment in the future.
Advisor cannot guarantee the accuracy or completeness of any statements or numerical data in this commentary. Past performance is no indication of future results.
