Let’s take a look today at just how attractive U.S. interest rates are relative to most of the world. To wit, the title of this week’s On My Radar piece, “The Best Looking Dude at the Dance.” Who in their right mind could have imagined that 1.50% would be attractive? We’ll look at the comparisons today and consider the implications. Lower for longer? Dr. A. Gary Shilling says yes. I’m getting concerned that too many are now in that camp (yours truly among them).
The bond market seems to have forgotten last Friday’s strong employment report. The worry about “What Would Janet Do” (raise interest rates) has subsided. The yield on the 10-year Treasury jumped from 1.49% to 1.58% back down to 1.50%. What is this telling us? One thing that’s apparent to me is that the global capital flow advantage goes to the U.S.
WWJD – here is what the CBOE’s Fed Watch tool is saying the probabilities are for a September 21 rate hike:
Further, the Fed meets on November 2 and December 14. CBOE puts the probabilities of a 25 bps to 50 bps FOMC rate hike at 86.2% in November and 57.4% in December (as of 10:45 am this morning). (This doesn’t mean they will hike each time.)
And what does this mean for you and me? I invited my banker to the golf course yesterday. He offered me a 2.75% for a 15-year mortgage. I hit that offer. Done – thanks Al. With many tuition payments to cover, the savings for me and my family is meaningful. For the record, I don’t think the Fed hikes. In my view, the debt drag and perfectly correlated low gross domestic product (GDP) growth are the main reasons.
Real GDP (ex. inflation) increased at an annual rate of 1.2 percent in the second quarter of 2016, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.8 percent (revised).
All recessions since 1948 started with an average growth rate greater than the current 1.2% rate. There are three instances where the one-year growth rate was below the current level and recession did not occur. Two of those were 2011 and 2012, where weak growth was met with renewed rounds of extraordinary stimulus (QE). Only 18% of all observations going back to 1948 are below the current 1.2% growth rate level. Of that, 94% occurred during or within a calendar quarter of a recession. Source @michaellebowitz.
Goldman Sachs says the poor GDP showing was due to cutbacks in inventories. They noted the longest stretch in nearly 60 years. They say inventory restocking will contribute positively in the second half. Let’s hope so. An economy compounding below 2% is not good for us in the long term.
This post crisis recovery is, as Trump might say, “terrible, terrible”:
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