It’s All About Interest Rates These Days

One of the big questions in the markets right now is what’s going to happen with interest rates. Investors have been speculating for weeks that the Federal Reserve will raise interest rates, which would drive a move from precious metals and other commodities back to the recovering equities sector. As the Dow has climbed speculation has been steadily increasing about when rates will go up, but it looks like there might be a while to wait yet.

The Federal reserve has just held its annual symposium in Jackson Hole, Wyoming, with guests including bankers and politicians from around the world, and one of the main topics of discussion as the economic recovery and how to keep it on track. Among the major economies the USA and UK are the ones most confident in the strength of their equities markets, so should also be the ones thinking most seriously about raising lending rates. However it looks as if this option is on the table, but not likely to be implemented just yet; policymakers in both countries, and certainly in the Fed, don’t think the time is right yet.

One area of concern in the US economy has been the employment rate. While better than 200,000 net new jobs have been created every month this year, the bad news is that a very large percentage of these have been part-time jobs; the total number of American workers in full-time employment is actually down, possibly by as much as half a million. That has implications for the recovery’s solidity, so the government and the Fed are keen to encourage employers to take on more permanent staff. That makes raising rates too risky to proceed with right now.

New Fed chief Janet Yellen believes that the US labor force still has a lot of slack in it and that even though hiring is improving, and the end of the unprecedented run of low rates has to be planned, the job market still hasn’t fully recovered from the recession. There are dissenting voices, even within the Fed itself – St. Louis president Bullard suggested a tightening of rates might even be brought forward – but Yellen’s vote is likely to carry the day and there probably won’t be any significant raise before early next year at least, and perhaps as late as early summer.

While the way ahead for the USA is up for debate Eurozone finance ministers are looking at cutting rates even further to stave off a deflationary spiral. Given the volume of trade between the USA and EU there are risks in having policies between the two markets diverge too much, so that’s likely to act as a further drag on any rise here. Japan is also planning to hold firm until prices are stabilized, again mainly because their economy is relying too much on part-time workers right now.

It’s always hard to predict rates far in advance and new developments could nudge the Fed into action at any time, but from the point of view of commodity investors it could be time to dial back talk of an increase in the near term. We could be nine months away from that becoming a reality.

Financial Update 8-21

Financial analysts have been talking about economic recovery for over a year now, and it’s been generally agreed that the world was indeed pulling itself out of the mire of the 2008 crash. There have been a few stumbling blocks along the way though, from the USA’s negative growth figures in the first quarter of this year to the recent setback in equities prices. News from Europe also points to the recovery not being as solid as it could be, with the Eurozone’s two largest economies, Germany and France, both reporting that their economies contracted last quarter. Now a new report from the Federal Reserve highlights the continuing effects of the economic crisis on ordinary Americans.

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Financial Update 8-14

Last month the Federal Reserve warned that the values of some stocks and junk bonds were starting to look inflated, a move that many took as meaning the long-running bull market might be starting to run out of steam. This week it’s starting to look as if they were right. Growing wariness of junk bonds has turned into a much wider sell-off that’s seen a whole array of industry benchmark stocks drop sharply. The CBOE Volatility Index – widely known on Wall Street as the “fear gauge” – hit its highest level for nearly four months as more risk-averse investors started moving their money to US Treasuries and other safe havens like gold. However it’s still not clear if the bull run has really come to an end or if other factors are causing a sell-off that could reverse itself in a few weeks.

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Is Immigration Still News? Maybe Not.

Illegal immigration across the USA’s southern border has always been a controversial issue, but it’s taken a massive turn for the worse in recent months. Since late last year more than 50,000 unaccompanied minors have entered the United States, more than three times the rate seen just a few years ago. The massive influx has overwhelmed immigration services, bringing complaints from liberals about slow processing and unsatisfactory accommodation for holding these immigrants while their cases are dealt with. With a genuine human tragedy going on it’s not the right time to point out to these liberals that they’ve always been against investing more money in border control, to the point where ordinary citizens have had to take on the responsibility themselves. Now the government is finally trying to authorize extra funding to sort out the crisis, but it’s a bit late.

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Financial Update 7-30

The economy is finally shaking off the last effects of the 2008 financial crash, and going by some indicators things are even better than they were before. The Standard and Poor 500 hasn’t just fully recovered from its plunge six years ago; it’s a full 30 percent higher than it was at the peak of the pre-crash housing bubble. Investor confidence now seems to be high and that’s being reflected in the price of stocks; the Dow Jones is also rising steadily and traders are moving out of safe hedges and back into equities in a big way.
Of course after the last two big stock market peaks – 2008 and the internet boom at the turn of the century – many analysts are looking at the ballooning market with a justifiable concern. Is this another bubble? Is it all going to crash again? Unemployment has been falling all this year, with at least 200,000 net new jobs created every month, but the national rate is still at 6 percent and actual economic growth is slow. It’s easy to understand the fear that this is a rising market with no real support under it.

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Financial Update 7-23

It’s taken a while for the US economy’s recovery to gather pace, but finally it seems to have developed enough momentum to bring a degree of confidence back to the stock and currency markets; the Dow Jones is rising steadily and the US dollar is pulling out of the mire it’s been stuck in for months. The best news of all is the employment figures; in June 288,000 new jobs were created, and in 2014 so far the total is pushing towards 1.5 million. Those figures have been seized on as evidence that the economy’s not just recovering; it’s booming. But is that the case?

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