Investment Consultant
Bridgebay Financial, Inc.
US Federal Reserve
At the September 17, 2015 FOMC meeting, the Fed left rates unchanged
after the much anticipated rate hike that the market had long awaited. The rationale was that it would restrain US
economic activity.
The Fed cited recent global financial and economic developments that
could impact and restrain US economic growth and keep inflation low. The Fed focused on the adverse impact of
global economic and market developments and lowered its inflation
forecast. The Fed lowered its long term
projection of the rate from 3.8% to 3.5%.
European Central Bank
The ECB kept the main policy rate unchanged in August, 2015 as growth
and inflation expectations were revised downward. The inflation rate is expected to be negative
in 4Q2015 due to low oil prices.
Eurozone inflation fell below zero in September for the first time in
six months, potentially bolstering the argument for the European Central Bank
(ECB) to stave off deflationary concerns with additional stimulus. The Euro
area’s consumer price index fell 0.1% from a year ago. The previous negative
reading came in March, when the ECB launched its bond-buying program.
Employment
US employers added a disappointing 142,000 jobs in September, raising
questions over whether slowing global growth is taking a toll on the US
expansion and if the Fed will raise rates this year.
August monthly figures were revised lower and wages were sluggish,
adding to the downbeat tenor of the report. While the unemployment rate held at
5.1%, the labor force participation rate fell further, remaining near its
lowest level since the 1970s.
The jobs report for August was 173,000 lower than the average 200,000
per month required. The economy added
less jobs than anticipated. The
unemployment rate dropped to 5.1% and the U6 underemployment rate dropped to
10.3%. The labor force participation
rate was 62.6% and 2Q GDP was revised to
2.7% which is below the median forecast of 3.2%.
Manufacturing
In September, US manufacturing activity expanded at the slowest pace
since May 2013, according to the Institute for Supply Management (ISM), a sign
that the strong US Dollar and tepid overseas demand is weighing on
manufacturers. The ISM index fell to 50.2 in September, down from 51.1 a month
earlier, dragged lower by production, new orders, and employment indicators.
However, readings have remained above 50—which separates expanding from
contracting activity—for nearly three years.
Corporates
In September the investment grade, corporate bond market totaled $21
billion in new supply across 14 issuers including Gilead, Marriott, and Lowe’s. Corporates outperformed Treasuries as a
result of strong demand.
Liquidity
Liquidity in the US bond market has changed dramatically from the
period before the financial crisis.
Historically, broker-dealers carried securities inventories on their
balance sheets and were willing to make markets in securities and take market
risk. The change in making markets, and
the record corporate issuances and low interest rate environment have made it
difficult for broker-dealers to make markets and inventory securities. Fixed income trading has become less
liquid.
Fixed income investors face longer holding periods than they would have
considered in the past. Lower turnover
strategies have a lower impact on transaction costs on portfolio especially
when there are changes in market liquidity.
Trading now requires a more deliberate approach to minimize transaction
costs. Conversely, there are attractive
prices for buyers when there are forced sellers in the market.
The liquidity in fixed income markets has changed across all sectors
including Treasuries. The ability to
trade in large blocks has changed.
Primary dealers that purchase directly from the Fed have been buying
fewer Treasures and volume has fallen.
The size of the Treasury market has doubled since 2008. US and foreign investors have purchased a
higher percentage of Treasuries sold by the Fed than the dealer community.
Puerto Rico
They released a 5-year plan to restructure and reduce the $28 billion
financing gap. This involves losses on
$72B in Puerto Rican debt.
China
Global financial markets were volatile in August following China’s
devaluation of its Yuan currency that triggered fears of a Chinese and global
economic slowdown. Chinese economic
weakness impacted commodity demand, emerging markets that are commodity based,
and drove fears of deflation. Crude oil
fell below $40 per barrel. Global growth
concerns highlighted by continued weakness in China weighed on global markets
in September.
China is at an inflection point as the services sector overtakes
industrials as the largest part of its economy. Countries ranging from Brazil
to Indonesia to South Africa saw their currencies plunge either to multi-decade
or record lows, underscoring the tumult facing emerging-market currencies.
The Fed’s new focus on non-US developments underscored China’s
far-reaching implications. The
volatility in Chinese equities, an unexpected depreciation of the Renminbi, and
another round of disappointing activity data.
USD Currency
The Fed’s decision to postpone a rate hike may put downward pressure on
the USD at first. Higher US yields may
support a trend to a stronger USD against global currencies. US companies with international sales have
usually not benefited from stronger USD although US consumers have with lower
prices. If the USD weakens, commodity
prices may rise temporarily. The excess crude oil supply and weaker Chinese
demand for commodities, prices will continue to trend downward, regardless of
the Fed action.
