Tags: dollar | economy | investors | federal reserve

This Cruel Summer Is Far From Over

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Friday, 31 July 2015 08:52 AM Current | Bio | Archive

U.S. GDP growth regained momentum as at increased at a decent pace of 2.3 percent on an annualized basis in Q2, but missed expectations for a 2.7 percent rise, while GDP in Q1 was revised upwards by 0.8 percent from negative -0.2 percent to +0.6 percent.

Consumer spending was up by 2.9 percent after rising 1.7 percent in Q1.

Business investment was down by 0.6 percent, which was mainly caused by the ongoing decline in energy investments, which should continue through the rest of 2015.

Exports rose 5.3 percent in contrast to a decrease of 6.0 percent in Q1, which diverges substantially (this is important) with what we see in most of the rest of the world where global trade is clearly losing momentum.

Imports also increased 3.5 percent.

All this resulted in the yield of the 2-year Treasury rising to 0.73 percent, which brought it close to breaching its high for the year while the 1-year Treasury yield rose to 0.34 percent, which was its highest yield in more than 5 years.

Both the 1-year and 2-year higher yields indicate the probability for a first fed funds rate hike in September is rising. Fed fund rates at 0.25 percent, or even 0.50 percent, have a 50 percent probability compared to a 0.40 percent probability we had only a week ago and 0.28 percent a month ago.

For portfolios that are built for the long-term it doesn’t matter that much if we see a first Fed fund rate rise in September or December or even in March of 2016 as anyway we’ll need some time for establishing a serious/profound estimation what the real impact of rising Fed rates probably could have on markets everywhere and as a whole.

We should not overlook the fact the day the Fed raises its policy rate it will be the first time it does that since December 2008 when it cut for the last time to 0.0-0.25 percent.

When we look at several important economies in the world, we see most monetary policies are still overwhelmingly in easing mode. This means in simple words when the Fed will start raising its rates, albeit with small increments of only 0.25 percent and at a slow pace, the Fed’s action probably will cause turbulence in many places, especially in the emerging economies and especially in many export-dependent (oil, commodities) economies.

We should also not overlook a good part of them have large, public as well as private, dollar denominated debts.

Which brings us to dollar. It’s really interesting to see how, for example, yields of 10-year government bonds of various countries diverge today.

For long-term investors, one thing is for sure: The day the Fed starts raising its fed funds rate, the dollar has little other choice than to move further up.

Take some relatively “easy” trading sovereigns, like the German 10-year that yields today 0.65 percent; France 0.94 percent; Italy 1.81 percent; Canada 1.49 percent; U.K. 1.91 percent, Japan 0.41 percent and the U.S. that yields 2.26 percent.

It’s clear: We live in a dangerous, completely out-of-sync — and therefore divergent — financial world, which one day will cost many investors dearly.


All that said, for those who thought the Greek problems were off the table for some time to come, the British daily The Guardian writes: “The International Monetary Fund will refuse to participate in a new bailout for Greece until there is an ‘explicit and concrete agreement’ on debt relief from the country’s eurozone creditors, an IMF official has confirmed. Without the IMF’s involvement, Greece’s eurozone partners will have to find more funds to meet Athens’ short-term financing needs, raising questions about whether the outline 86 billion euros ($94 billion) bailout thrashed out earlier this month will prove workable.”

For six years now, the Greek bailout saga has been a complete fiasco. I can’t see how this could change for the better now and probably forever as long as Greece remains “trapped” in the single currency, the euro.

Besides its unsustainable debt, the just released unemployment report by Eurostat shows unemployment in Greece is at 25.6 percent while youth unemployment came in at 53.2 percent, which underlines once more the country is financially, economically — as well as socially — a complete disaster.

Conclusion: Be prepared for fresh market turbulence that probably won't wait until the summer is over.

We haven’t seen the “high” for the dollar yet.

About the Author: Hans Parisis
Hans Parisis is a regular contributor to the Financial Intelligence Report. To join the Financial Intelligence Report, click here. Click Here to read more of his articles.

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HansParisis
Be prepared for fresh market turbulence that probably won't wait until the summer is over. We haven’t seen the “high” for the dollar yet.
dollar, economy, investors, federal reserve
765
2015-52-31
Friday, 31 July 2015 08:52 AM
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