September 19, 2017

Stocks opened slightly higher this morning (Dow +36 pts; SPX +.1%). The VIX Index is down around 10 as stock markets hover around all-time highs. Telecoms are up over 2% in early trading as Sprint (S) and T-Mobile USA (TMUS) are in talks to merge. Banks are up .5% as interest rates continue to edge upward. And for the same reason real estate and utilities are trading a bit lower.  The dollar is a bit weaker against a basket of foreign currencies, but commodities are mostly lower as well. WTI crude oil is down .3% to trade around $49.70/barrel. Both iron ore and copper are down for the month. Bonds are down in price again as yields rise. The 5-year Treasury yield ticked up to 1.83%  and the 10-year is back up to 2.24%. Rates in the US seem very low until one looks overseas. The German and British 10-year note yields are currently trading at .44% and 1.31%, respectively. 

A good part of the reason for lower rates around the world is that we’ve seen years of very loose monetary policy. Today, the Federal Reserve begins a two-day meeting to discuss monetary policy and consider 1) its plan to reduce the size of the Fed balance sheet, and 2) possible interest rate hikes. In other words, the Fed is now clearly in “tightening” mode and is considering how best to normalize interest rates without choking off the economic recovery. And by the way, it looks as though the Bank of Japan is also trying to feel its way gradually toward “unwinding stimulus” as Bloomberg notes. Economic conditions in Japan, China and Europe have improved over the last year. 

Richard Kovacevich, former CEO of Wells Fargo, wrote an op-ed in the Wall Street Journal this morning. He says we should stop worrying about low inflation and learn to love it. “I don’t understand why [the Federal Reserve] wants [higher inflation].” He points out that low inflation is really helping workers because they’re retaining purchasing power despite slow wage growth. And in his view, “The only bright spot in our economy is the consumer.”  Mr. Kovacevich points out that an arbitrary 2% inflation target isn’t useful alone in determining monetary policy. The Fed should think about inflation relative to economic growth, and we’re still stuck in the 2% GDP range. 

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