More predictions sense there will be no economic impact from the impeding QE3.
What are going to be the effects of low interest until at least 2013? Borrowers will benefit, savers will suffer as interest rates fall which will cause a mixed blessing for firms. Good article below from The Wall Street Journal detailing this.
Here are the top financial stories of the day:
1) Stocks jump; Dow notches best gain in 2 weeks-From the AP
The Dow Jones industrial average is closing with its biggest gain in nearly two weeks.
Investors were picking up beaten-down stocks Tuesday after fears that the U.S. would slip into a recession pounded the market over the last month.
The Dow rose 322 points, or 3 percent, to close at 11,177. That's its best day since it jumped 423 points Aug. 11. It dipped about 60 points shortly after the quake hit the East Coast in the early afternoon, but recovered within minutes.
The S&P 500 index rose 39 points, or 3.4 percent, to 1,162. The Nasdaq rose 101 points, or 4.3 percent, to 2,446.
Five stocks rose for every one that fell on the New York Stock Exchange. Trading volume was higher than average at 5.2 billion shares.
2) Bernanke's 'Playbook' Can't Work Magic-From The Street
While it's possible Federal Reserve Chairman Ben Bernanke may use his speech in Jackson Hole, Wyo., to lay the groundwork for further quantitative easing as he did at the
The Dow sold off almost 150 points in reaction to Bernanke's speech on Aug. 27, 2010. A few days later, the rally began and the blue-chip index was able to add roughly 1200 points in the two months prior to the Federal Reserve
When the good news arrived on Nov. 3, 2010, the Dow jumped another 200 points then climbed steadily for the next six months or so, reaching near-term highs above 12,800 in late April of this year.
In the current economic environment, a similar rally after Bernanke's words would seem a miracle.
With interest rates already targeted near zero until mid-2013, the
In the very 'best' scenario, Bernanke would say that the Fed is ready to act on some combination of the above action. But economists are saying that the threat of core inflation is too high and won't ease until at least next year. If Bernanke plays ball and the markets assume QE3 won't be announced for another four months down the road, then an imminent rally on the chairman's words seems unlikely.
Furthermore, even if investors do expect further quantitative easing from the Fed, whether that alone would send investors back into stocks is also uncertain. The idea that fiscal stimulus is the answer has taken a hit given how QE2 played out. Stocks have essentially tanked since the $600 billion bond-buying binge concluded at the end of June, and neither the housing market nor the employment picture saw any meaningful benefit beyond stabilization.
"You can't necessarily say that further quantitative easing will put the economy in a better place," says Paul Nolte, strategist at Dearborn Partners.
He expects Friday will be nothing more than the "proverbial pushing on a string," adding later that: "Bernanke is working with one lever that doesn't necessarily reach into the economy as much anymore."
"While I don't think we're setting ourselves up for disappointment, there won't necessarily be a catalyst for upside either," says David Lefkowitz, strategist at UBS. "No one speech is going to change anything in a big way." Like many economists, Lefkowitz is largely expecting Bernanke to "clarify" the Fed's options and "reassure" investors, not announce QE3 definitively.
So what can we expect Friday's market reaction to be?
Given the violent swings after the Federal Reserve's
For this Friday, Nolte of Dearborn Partners says he expects a swing in the Dow, either up or down, of 75 to 150 points. However, "whether anybody is willing to hold that position over the weekend is another question," he added.
The longer term effect of Bernanke's speech is much harder to predict.
Bernanke's language could be interpreted two ways as the FOMC announcement was. On the one hand, keeping interest rates near zero until at least 2013 made investors feel like the Fed was doing something. On the other hand, the announcement suggested that the Fed was worried about a double-dip recession but remained reluctant to say the "R" word.
Similarly, investors might cheer if Bernanke shows that the Fed stands ready to act.
But "the fear is that an aggressive move would be seen as an admission by the Fed that the economy is slipping into a recession," writes Marc Pado of Cantor Fiztgerald. "In an environment where the one thing that is lacking is 'confidence,' we don't want to see the Fed Chairman panicking. On the flip side, to do nothing might be seen as complacent, and hurt the market."
Jim Cramer weighs in with his prediction for Friday in
The disappointing results of the meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel
Lefkowitz of UBS notes that Merkel and Sarkozy didn't give a 'playbook' for solving the Eurozone crisis. "I think they missed expectations in that regard whereas I think the Fed will give you a playbook so expectations will be met."
Another factor to consider is that the timing of Bernanke's speech, which coming just before the weekend might allow investors extra time to digest his words. By the following Monday, investors could be trading on more fundamental news than speculation.
3) Living in a Low-Rate World-From The Wall Street Journal
Federal Reserve Chairman Ben Bernanke has put the financial world on notice: Brace for two more years of rock-bottom interest rates.
That is great news for borrowers, but it promises rough going for anyone seeking returns from fixed-income investments—from retirees to giant pension funds to companies sitting on record amounts of cash.
It has been almost three years since the Fed cut its key rate to almost zero, and on Aug. 9, the central bank said rates are likely to remain there until at least mid-2013. Rates for everything from Treasury bills to money-market funds are near zero. The yield on the 10-year note briefly slid below 2% last week, a level last seen in April 1950.
Central banks traditionally use low rates to prompt more borrowing and nudge investors to seek higher returns in riskier assets like stocks, thereby boosting the broader economy.
But the benefits may not flow so easily. Consumers are showing few signs of wanting to borrow, bank and insurer profits are likely to suffer, and, with the stock market sliding, pension and other investment funds face years of low returns.
Some analysts worry the U.S. may be in for a Japan-like scenario of years of low rates, sluggish growth, and poor returns.
If you do Depression-type studies, then you've seen this pattern before—or Japan," says Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch. "Both comparisons are not great."
Consumers
For consumers, low rates mean cheap loans for everything from a new home to a new car. But with millions of people nearing the end of their working lives, low rates also portend meager returns on fixed-income investments. With the stock market well below its 2007 highs, that could be particularly painful."The retiree who doesn't have any debt, but relies on interest income to supplement their Social Security check, they're really feeling the squeeze from lower interest rates," says Greg McBride, senior financial analyst at personal finance website Bankrate.com.
Yields on savings vehicles such as certificates of deposit, or CDs, have fallen sharply. In 2006, the average one-year CD yielded roughly 3.78%, according to Bankrate.com. As of last week, that was down to 0.42%. Average seven-day yields on the more than $2.5 trillion in assets in money-market mutual funds are near zero, at 0.01%, according to data provider iMoneyNet. In 2007 they hovered above 4.5%.
On the flipside, mortgage rates have tumbled sharply. On Friday, Freddie Mac reported mortgage rates hit their lowest level in more than 50 years, with the average 30-year fixed-rate mortgage at 4.15%.
Banks
One of the most basic ways banks make money is by borrowing at low short-term interest rates and lending at higher long-term rates.While short-term rates have little room to fall, longer-term rates have been in decline.
Banks try to cope by cutting what they pay depositors, but that often isn't enough. One measure showing the pressure is banks' yield on assets, which fell to 4.41% for banks with assets of more than $1 billion in the first quarter, the lowest in at least six years, according to the Federal Deposit Insurance Corp. Exacerbating the problem, demand for loans is low, and customers are still pouring in savings.
Zions Bancorporation of Salt Lake City is cutting rates by as much as two-thirds on certificates of deposit as they mature, in an effort to keep costs down while loan demand is weak.
In Ann Arbor, Mich., small mortgage lender University Bank has few takers for loans. "My customers aren't borrowing, because they are worried about the future," says Stephen Lange Ranzini, the bank's chief.
On the upside: Banks are sitting on $19 billion of unrealized gains, mainly on Treasurys and other bonds that rallied amid the economic uncertainty, according to Nomura Equity Research. But generally, the negatives outweigh the positives.
"The risk is that low interest rates will eat into profits for years," says Craig Siegenthaler, an analyst at Credit Suisse.
Companies
Low rates are a mixed blessing for corporations, which have been raising billions in the bond market at sometimes record-low rates. But companies including Apple Inc. and Google Inc. are also sitting on record amounts of cash. According to Standard & Poor's, the top 500 U.S. companies by market capitalization had almost $1 trillion in cash and cash equivalents at the end of the first quarter. Low rates mean they are earning remarkably little on that hoard.Data-storage company Equinix Inc. keeps the majority of its $1.2 billion in cash in Treasurys, but the Redwood, Calif.-based company is getting a tiny return of 0.10%, says Chief Financial Officer Keith Taylor. In some cases, it is a negative rate after fees, he says.
In late July, Mr. Taylor began moving cash to higher-yielding assets such as commercial paper, where the company receives about 2%, he says. He is also looking at moving funds into the debt of countries like Canada.
Others are moving to take advantage of low borrowing costs. At Utah-based self-storage company Extra Space Storage, finance chief Kent Christensen's team is working to lock in the lowest interest rates he has seen in years.
Mr. Christensen says the sudden drop in interest rates has emboldened the company to quickly refinance the debt on some of its 820 storage facilities, which could save $2 million to $4 million this year.
"We have more interest and debt than we did three years ago, but we're actually paying a lower amount of interest costs than we were," he says.
Institutional Investors
Pension funds and insurance companies are among the biggest owners of bonds in the U.S., and they face serious headaches as they cut checks to retirees or pay claims to policyholders.For many pension funds, low yields are one half of what Goldman Sachs analysts call a "double whammy" with lower stock prices. Goldman estimates that the aggregate funded status—a measure of plan assets as a share of estimated obligations—of U.S. corporate-pension plans in the Standard & Poor's 500-stock index was down to about 75% as of mid-August, from 85% at the beginning of 2011.
State pensions face a similar squeeze. The plans are shooting for a return of 8%, the median assumption of 126 plans, the National Association of State Retirement Administrators says on its website. That would be a challenge at the best of times.
Insurers are sensitive to interest rates because premiums that pour in from policyholders are mostly invested in bonds. Some insurers, like MetLife Inc., have hedging programs to help manage the situation, according to Barclays Capital. Still, "low interest rates are pressure points" across the industry, says UBS Securities insurance analyst Andrew Kligerman.
Insurers are likely to raise prices to make up for some of the lost income, though those in highly competitive parts of the property-casualty industry will find it tough to do so, analysts say. As rates have fallen over the past couple of years, some life insurers already have redesigned and repriced products, offering less-generous benefits, and some have exited product lines entirely.
The problem is worrisome enough for Moody's Investors Service to release a report Friday warning that ultralow rates for five or more years would subject some life insurers "to substantial losses that could result in downgrades, some multi-notch."
Quote of the Day from Dave Ramsey.com:
Many of life's failures are people who did not realize how close they were to success when they gave up. — Thomas Edison
No comments:
Post a Comment