Tags: united states | economy | china | europe

US Still Remains By Far the Best House in a Bad Neighborhood

Wednesday, 22 April 2015 07:01 AM Current | Bio | Archive

The Conference Board released its March Leading Economic Index (LEI) for China that increased by 0.2 percent, which is its weakest monthly growth in more than a year, to 317.8, after a 1.4 percent increase in February and a 0.6 percent increase in January.

Three of the six components, exports, consumer confidence, and real estate all weighed negatively on the LEI while the six-month growth rate has also been slowing year-over-year, which suggests the Chinese economy probably will continue losing momentum through the summer.

The Conference Board Coincident Economic Index (CEI), which measures current economic activity, increased 1.7 percent in March to 274.2 (2004 = 100), after increasing 0.6 percent in February and declining 0.8 percent in January. Four of the five components contributed positively to the index for March.

These Conference Board Indexes don’t suggest “yet” Chinese authorities are on the brink of launching massive stimuli measures, which could weaken the renminbi/yuan at a moment Senator Chuck Schumer said there is strong bipartisan support for a “measure” to discourage China from currency manipulation that could be part of the “trade promotion authority” legislation.

Now, and in context of the question when the Fed could finally start raising its rates, Dennis Lockhart, President of the Atlanta Fed President, recently said that a “murky” economic picture had obliged him to “lean to a little later versus a little earlier” on when the Fed’s “first” rate hike since June 2006 could happen.

It’s still a big unknown what impact rising Fed fund rates would have on Treasury yields/rates.

This is an enormously important “unknown,” especially now we are closing in on that historical dawn of rising Fed fund rates.

Please keep in mind we are in the bottom area of a 31 year downward slope of Treasury yields/rates. In 1981, the 10-year Treasury topped at 15.80 percent and on Tuesday it yielded 1.90 percent. By the way, the 10-year Treasury yield bottomed in 1945 at 1.47 percent.

Again, rising fed fund rates won’t immediately cause rising Treasury yields/rates, but once the Fed’s upward path becomes clearer, yields will be impacted.

Anyway, whatever is said, there is a bigger probability of rising rates in the U.S. over the coming years than less.

Now, once that move gets underway, we’ll enter a new cycle where we’ll also have a strong dollar relative to prices of goods and services for years to come.

For U.S. buying power that’s a positive, but that won’t be so for those that don’t generate U.S. dollars from their goods and services. When we look at the dollar-denominated credit market, which stands today at a mindboggling $53 trillion, which amount is greater than at the 2006/2007 top, and once rates start rising, that huge amount of debt will become like a snowball that will start running down the hill and grow further…

Of course, in context of the persistent strength of the dollar against the euro that many already consider as way to strong, but and given that the timing of a hike (within reason of course) is a subordinate consideration to the advanced stage of the U.S. economic cycle relative to European cycle, I can’t see how or why the euro could substantially strengthen against the dollar over the near term.

Watch out when investors will start selling their about 2 trillion euros ($2.16 trillion) negative yielding European sovereigns.

Yes, it’s only a question of time and Bill Gross could be very right when he said the 10-year German Bund is the “short” of a lifetime.

In the meantime on Greece we learned: “The European Central Bank is now demanding that the value of the collateral that Greek banks post at their own central bank to secure these loans be reduced by as much as 50 percent, according to people who have been briefed on these discussions but who were not authorized to discuss them publicly … these people also said, if the Greek government and Europe remain at an impasse on an agreement about austerity measures, these so-called haircuts could increase further.”

No, that doesn’t bode well!

Well, uncertainty is everywhere while the U.S. still remains by far the best house in a bad neighborhood.

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Well, uncertainty is everywhere while the U.S. still remains by far the best house in a bad neighborhood.
united states, economy, china, europe
Wednesday, 22 April 2015 07:01 AM
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