Tag Archive | "Janet Yellen"

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Weather Sinks Jobs

Weather took the blame for a second consecutive non-farm payroll report as equity investors blinked but quickly recovered leaving the dollar and bond market to shoulder the load on Friday. With projections for about 185,000 new jobs in January, the Labor Department’s final report January card was a dismal 113,000 new jobs gained. Compiled with the disappointing 74,000 net gain in December, the under-200,000 two-month report was initially interpreted as softness in the economy.

However, a strong US consumer credit report turned the market around as investors realized the powerful American consumer seems undeterred. The Federal Reserve announced that total consumer credit in December rose $18.8 billion to $3.1 trillion, the biggest gain since February 2013.  

Analysts had projected in increase of about $12 billion. Meanwhile, revolving credit, which measure credit card growth, climbed by $5 billion in December. Both measures point to an engaged consumer, a definite boost to the economy.

Non-revolving credit increased $13.8 billion in December. This includes auto loans and government initiated student loans. Non-revolving credit only expanded by $465 million in November.

A New Course For Yellen?

Speculation immediately arose concerning a new direction by the Federal Reserve. Despite the weak private sector job growth, the nation’s unemployment rate fell 1 percent to 6.6 percent, the lowest rate in five years.

Initially, the Fed set 6.5 percent unemployment as the target to halt bond buying. Most investors and analysts suspect the Fed will fine tune initial goals and tie easing to the broader ranging SEP (Summary of Economic Projections). Investors seemed content that the weak jobs report was a blip in the overall economy, mostly resulting from severe weather that has paralyzed areas of the country in the past two months.

And, February weather has also been difficult. The Fed is scheduled to meet with Janet Yellen at the helm on March 18-19, when revisions to policy could be announced. The February non-farm payroll report will be released before the meeting so Yellen will have three-month composite to review.

Interestingly, the report for February indicated that some 29,000 jobs at all levels of government were lost. The labor participation rate increased to 58 percent, the highest figure since October. In analyzing the unemployment rate reduction, one must not only consider the weather but also the booming number of retirees leaving the workplace as baby boomers move on.

Equities Rally, Dollar Softens

Equities recovered nicely after the disappointing payroll report. The dollar did not fare as well. Investors view the employment glitch as inconsistent with the strong growth in the last quarter of 2013.   

MSCI All-country index – Up 1.09 percent

MSCI Emerging Country Index – Up 0.89 percent

Dow Jones – Up 0.92 percent or 144.4 points to 15,772.99

S&P 500 – Up 1.17 percent or 20.67 points to 1,794.1

NASDAQ – Up 1.56 percent or 63.331 points to 4120.452

Forex pairs

Euro- USD – 1.3633

GPB – USD – 1.649

USD – Yen – 1.0233

USD – CAD – 1.1101

USD – Ruble –  34.7375

US Dollar Index – Down 0.26 percent to 80.694  

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Summers Out, Wall Street Up

Faced with a grueling confirmation process that appeared likely to come up short, Lawrence Summers bowed out of the race for the Chairmanship of the Federal Reserve. With Chairman Ben Bernanke’s tenure set to expire in January, the new frontrunner for the post is Janet Yellen, considered a stimulus tapering dove by most observers.

Wall Street greeted the Summers withdrawal with enthusiasm pushing early morning markets to robust highs before settling in the wake of the Navy Yard shootings in Washington. Markets were lukewarm to Summers, thought to be a hawk or more aggressive about tapering.

In the wake of the announcement, equities climbed and the dollar slumped as CME Group’s Fed Watch projected A 55 percent probability rating that the first rate hike would be in December 2014. January 2015 had a 68 percent probability rating. Before Summers’ withdrawal, traders indicated that the first tapering would take place in October of this year.

Summers was most likely guided by an announcement after trading hours on Friday that four Democratic Senators on the Senate Banking Committee would be voting against his confirmation. When Montana Senator Jon Tester stated his opposition, the die was cast.

Obama Addresses Upcoming Debt Ceiling Talks

President Obama told the public that he will not negotiate with Congress regarding the upcoming debt ceiling increase that could expire as of October 15, 2103. Republicans in Congress have used the debt ceiling to extract a heavy price in the past but with an election year coming up, the President appeared unlikely to give in to Republican demands.

If the extension is not passed and if the President does not bend, the government will be shut down. If the public perceives Republicans are to blame, the precedent of the mid-90’s would favor Democrats in the 2014 elections.

The current debt ceiling limit is $16.7 trillion. Republicans continue to want to include revisions to Obamacare as part of an extension.

On Monday, Obama said; “Let’s stop the threats. Let’s stop the political posturing. Let’s keep our government open. Let’s pay our bills on time. Let’s pass a budget. I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States.”

Currency Markets Move

The dollar index slipped 0.2 percent against six major currencies to 81.273.

The dollar lost 0.2 percent against the yen to 99.12 after rallying from the low of the day 98.48. The dollar hit its lowest level against the yen since September 6, 2013.

The euro climbed to $1.3336 after reaching a three week high of $1.3385 earlier in the session.

The strongest currency against the USD was the South African rand which jumped 1.8 percent against the greenback.

Speculation prevailed that the first round of easing under a Yellen leadership would be $10 billion per month.

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Federal Reserve Uneasiness Weighing On Markets

Uneasiness about Federal Reserve policy and about the succession plan have sent equity markets into a tailspin and currency markets into a state of high volatility. On Monday, US equities posted their fourth consecutive losing day. In overnight trading, global shares again lost ground as concerns about the Fed weighed heavily on the global marketplace.

And, not to be overlooked is concern about who will replace current Fed Chair Ben Bernanke. President Obama has apparently narrowed the field to the two most popular candidates, former Treasury Secretary and former President of Harvard, Lawrence Summers, and current Fed Vice Chair, Janet Yellen.

As Obama considers his options and refines his choice, he seems to be adding additional weight to the job description. On Monday, the President addressed the lingering need for more legislation in line with the controversial 2010 Dodd Frank law. The President called upon regulators to move forward with much of the regulatory reform cited in the law that has been slow to develop. Only 40 percent of the new Dodd-Frank regulations have been implemented and some of the bill’s most protective regulations remain in flux, tied up between five groups of regulators who cannot agree on policy.

On Monday, the President called upon the Federal Reserve, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau to more aggressively overhaul regulations and ensure protection against another meltdown similar to 2008.

The beleaguered Consumer Protection Agency has been leaderless since its inception. In July, the Senate finally confirmed long-time candidate Richard Cordray to lead the agency, which is charged with reforming a host of consumer credit products, including mortgages.

However, the new Fed czar will have to add tighter regulation to its list of primary responsibilities. For the past 5 years, Chairman Bernanke has concentrated upon jobs and inflation. With Obama’s new mandate, regulation will be a top priority. This announcement may give some insight into who the President favors to replace Bernanke.

Summers vs. Yellen

As the world watches this drama play out, the minutes from the last meeting are due out tomorrow. The Federal Reserve is also meeting this week at Jackson Hole. What markets want to know is when tapering will commence and to what extent. The lack of definition has created shifts in emerging economy currency markets and propped up British sterling and the euro.

However, global equity markets are uneasy fearing that money will become tighter in the world’s largest economy. Fiscal conservatives say a pullback from current stimulus spending is overdue. Less conservative economists believe there is nothing to fear and the Fed should continue its aggressive buying policy.

Conservatives are at peace with inflation and are content with the slow job growth. More liberal economists believe inflation is under control and there is no reason to halt bond buying until employment shows significant progress.

In the backdrop to the Summers – Yellen selection, the Federal Reserve will be closely watching the September bank stress tests. A spokesperson for the Fed said on Monday; “Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do.” When the stress tests were applied in 2013, 18 banks were scrutinized. Beginning in September, 12 additional banks with assets of more than $50 billion will be added. In the round of testing concluded in March, JPMorgan Chase and Goldman Sachs were reprimanded. The spokesperson said that although 14 banks met Federal Reserve expectations, there were consistent issues with modeling techniques.

As the President considers the two possible new Fed leaders, Summers clearly has a higher profile than Yellen. However, many of Summers’ decisions and policies have been controversial and he has pulled back from many of his positions prior to the recession. Obama’s Monday declaration that regulation is an important part of the Federal Reserve may well shift the momentum to Yellen.

Summers, who served as Treasury Secretary under President Clinton, played an important role in overturning Glass-Seagall, which had restrictions between commercial and investment banking. This lack of regulation gave birth to the aggressive investment banking policies that helped create the financial meltdown and allowed for the creation of “Too Big To Fail “ banks.

Summers also supported a lack of regulation of the swaps market. The opposition allowed for the explosion of derivatives that were major causes in the collapse of the country’s financial institutions. Summers resisted and in fact is on record as scoffing at concerns that abuses in derivatives were putting the nation’s investment banks at risk.

Since 2009, Summers has reversed direction in keeping with Obama’s response to the challenges. As a trusted Obama adviser, Summers may have an inside track but his political history is muddled and unclear. Obama has consistently stated that regulators should not be politically connected. It would be difficult to distance Summers from politics.

During her tenure as President of the San Francisco Federal Reserve, Yellen saw the housing collapse coming before the actual meltdown. She spoke publicly about the risks and the exposure of the nation’s banks. Yellen warned that banks should be required to raise their capital requirements. As Vice Chair, Yellen has continued to call for higher standards.

If Obama can separate the politics from the mission at hand, Yellen appears the highly qualified choice. From a consistent policy standpoint and as an early advocate of tighter financial regulation, Yellen should be the candidate to take the reins from Bernanke. The possibility of her appointment and the undefined tapering policy are adding edge to the markets.

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