Tags: fed | fischer | investors | economy

Investors Should Brace for 'Sizable Correction' to Jolt Markets

Investors Should Brace for 'Sizable Correction' to Jolt Markets

(Dollar Photo Club)

Monday, 22 August 2016 09:32 AM Current | Bio | Archive


Vice Fed Chair Stanley Fischer said in a recent speech the U.S. economy is close to the Fed’s targets.

It’s interesting to take notice that Mr. Fischer didn’t say anything about interest rates.

Anyway, investors should keep in mind that the Fed’s dual mandate aims at maximum sustainable employment and an inflation rate of 2 percent as measured by the price index for personal consumption expenditures, or PCE.

When Mr. Fischer stated: “Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment. The economy has done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent -- and the core consumer price index inflation rate is currently above 2 percent,” long-term investors could ask themselves what keeps the Fed on hold, at least so far, from starting its long way to normalization of its Fed funds rates.

When we also take in context what Mr. Fischer added: “Overall macroeconomic policy does not have to be confined solely to monetary policy. In particular, monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth. Rather, the key to boosting productivity growth, and the long-run potential of the economy, is more likely to be found in effective fiscal and regulatory policies,” which is of course not the task of the Federal Reserve but belongs to the domain of the policy makers.

In simple words: “We (the Fed) have done our part, it’s now the turn of the policy makers in Washington and even on State level to do (urgently) their part.”

Of course and besides all that, the Fed cannot overlook the risks that imply geopolitical risks, the strength of the dollar, etc. for the U.S. economy, but it’s also a fact that most of these categories of risks have been out there for quite some time and will not go away anytime soon.

Maybe, or better said "hopefully," Fed Chair Janet Yellen’s Jackson Hole speech on Friday will make us a little bit wiser about how she, which implies of course the FMOC, sees the U.S. economy as well as the PCE, or price index for personal consumption expenditures, over the short to median term.

Keep in mind that on the PCE we will get an update or “second” revision on Friday (Ms. Yellen will be fully informed about that number before her speech) that comes together with the revision of the GDP growth figure during Q2, of which we will get the what’s called “third” revision on September 29.

Investors should better not overlook that when we got on July 29 the advance (first) estimate of GDP growth in Q2, the PCE price index increased 1.9 percent, compared with an increase of 0.3 percent. Excluding food and energy prices, the PCE price index increased 1.7 percent, compared with an increase of 2.1 percent.

Investors should also be aware that any upside surprise of the PCE inflation number should raise significantly the probability of a Fed rate hike sooner rather than later, and if that would be the case, this would translate in a higher dollar that in turn would not be a positive for equities and commodities, but a positive for Treasury yields, which means lower bond prices, which shouldn’t be restricted to Treasury bonds alone.

Of course, we aren’t there yet, but it could be of utmost importance for most investors as, for example, and because of the “understandable” scramble hunt for yield, at present the price-to-sales ratio of the U.S. utilities sector stands at 3 standard deviations (!) above its long run average, which has switched blinking warning lights on.

No doubt, we are closing in on a sizable correction and investors should fasten their seat belts. 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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No doubt, we are closing in on a sizable correction and when that comes, it will be fasten seat belts.
fed, fischer, investors, economy
Monday, 22 August 2016 09:32 AM
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