Stocks did nothing in the US on Wednesday while the big stories of the day came from international central banks with the Bank of Canada keeping rates on hold and the Reserve Bank of New Zealand cutting interest rates unexpectedly.
Wednesday also marked the seventh anniversary of the post-crisis bottom in the stock market, and while some declared that today was the bull market’s birthday, the team at Bespoke Investment Group noted that with the benchmark index having not made a new high in about 10 months, technically the bull market has ended.
First, the scoreboard:
- Dow: 16,976, +12, (+0.1%)
- S&P 500: 1,985, +7, (+0.3%)
- Nasdaq: 4,667, +19, (+0.4%)
- WTI crude oil: $38.20, +4.6%
After the market close on Tuesday, Jeff Gundlach of DoubleLine Funds held his latest webcast talking about markets and the economy.
But the big takeaways from Gundlach’s webcast are his views that the recent rally in risk assets — stocks, basically — looks short-lived and added that bear market rallies, “always look better than the real thing.” Overall, Gundlach thinks the S&P 500 right now has about 2% of potential upside and 20% of potential downside. Again, unfavorable.
And while Gundlach typically has a dour to outright negative view on markets and the economy — he is, after all, a bond guy — he noted Tuesday that the current trend in the labour market would point towards continued progress in the US economy.
Citing this chart of the unemployment rate and the 12-month moving average of the unemployment rate, Gundlach argued that as long as the rate itself is below the unemployment rate’s trend, the economy should continue to expand or at least not dip into recession.
Turning to the global economy, however, Gundlach pounded the table on China’s economic data, arguing that with exports and imports both collapsing there is simply no way the world’s second-largest economy is growing by 7% per year.
On Wednesday afternoon in New York — Thursday morning in New Zealand — the Reserve Bank of New Zealand cut its benchmark interest rate to 2.25% from 2.5% in an unexpected monetary easing.
In response to this move the New Zealand dollar, known as the kiwi, got slammed, falling more than 1% against the US dollar to as a low at $0.667. In its statement, the RBNZ said its cut rate, “due to weaker growth in China and other emerging markets, and slower growth in Europe. This is despite extraordinary monetary accommodation, and further declines in interest rates in several countries.”
The RBNZ also cautioned on inflation, which remains low due to energy prices, but noted that expectations of future inflation have declined further. Which, well, you know how we feel about that.
Elsewhere in central banking the Bank of Canada kept its benchmark rate unchanged at 0.5% as expected. In its statement the BoC said:
Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.
The loonie was a bit stronger against the dollar following this announcement.
Former Fed chair Ben Bernanke was also out Wednesday with his latest blog post, this time writing about China and its policy options. Bernanke outlines that China faces a classic “policy trilemma” — at least under the Mundell-Fleming model, as noted by Bloomberg’s Luke Kawa — which says a country can have two of the following three things:
- A fixed exchange rate
- Independent monetary policy
- Free capital flows
Basically, China wants to have all three but that just isn’t, realistically, how this is going to go. Lots of hedge funds are betting on a devalued yuan, for one thing. And China’s foreign exchange reserve release is now a closely-followed economic release.
As a solution, Bernanke offers a new round of fiscal stimulus aimed not at stoking industrial activity but aiding consumers.
Targeted fiscal action has a lot to recommend it, given China’s trilemma. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country.
At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term.
Thus, in this way China could effectively pursue both its short-term and longer-term objectives without placing downward pressure on the currency and without new restrictions on capital flows. It’s an approach that China should consider.
Young Wall Street
Wall Street is getting younger.
Matt Turner was out with a piece Wednesday morning on how Wall Street is executing what they’re calling a “juniorization” in which old expensive workers are turned into young, cheap ones.
A lot of this has to do with technology, both as a way to push the business forward more efficiently and because technology shapes the behaviour of markets, leaving some old-timers slow to adapt.
“As trading becomes more electronic, older traders struggle to adapt, so part of this is natural evolution,” one credit-market veteran told Turner. “Also given cost pressures this setup is the only way you can manage your fixed costs — a barbell approach.”
So the barbell idea means that instead of giving out Managing Director titles because people have been there for a while, you give MD titles to people who are actually additive to the business and surround them with young pups. Again: fewer expensive workers, more cheap ones.
Of course, some people are worried about, well, at least a version of bond market liquidity. One veteran told Turner, “If there is a bond crisis, there is very little experience to deal with it.” Which, yes, that is true. But also I’m sure there were lots of experienced folks on desks in 1994 and 2007 and it’s unclear if that helped them deal with those markets shocks.
This is, on the one hand, sort of an unfair and flip way for me dismiss what is obviously an inflection point in the investment business’ evolution. On the other hand, the whole thing about worries over bond market liquidity is that to this point they are merely that: worries.
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