Canada a step closer to hiking rates from record low?

Tuesday, March 2nd, 2010

By Peter Bookvar, via Big Picture

After Australia raised rates to 4% as expected, the other major commodity country, Canada, decided to leave rates unchanged at their record low of .25%, as expected. They also repeated that policy won’t change before the end of Q2 but they hinted that they could go up soon after as they said “core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity.” They also said “the level of economic activity in Canada has been slightly higher than the bank had projected” in its Jan report. Rates have been at record lows because of the BoC’s concern with economic growth in the US, Canada’s biggest trading partner, and due to the strength in the Canadian $ which today is rallying to a 6 week high vs the US$ but the time has passed for record low interest rates in Canada considering their more positive outlook and bubbly housing market.

Tags: 6 Week, Australia, Big Picture, Boc, Canada, Commodity, Core Inflation, Country Canada, Economic Activity, Economic Growth, Hiking, Housing Market, Low Interest Rates, Partner, Positive Outlook, Q2, Record Lows
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Economy and Bond Market Highlights

Sunday, January 24th, 2010

The Economy and Bond Market
Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

The Economy and Bond Market

Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

Tags: 30 Year Mortgage Rates, Banks, Bond Market, China, Chinese Attempts, Chinese Government, Economic Activity, Economic Data, Economic Recovery, Economy, Emerging Markets, Energy Prices, Financial Markets, GDP, Index Of Leading Indicators, Macro Issues, Market Economy, Measures, Producer Price Index, Rising Energy, Stimulus, Treasury Yields, Year Mortgage
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Inflation expectations approach pre-crisis range

Tuesday, January 12th, 2010

On the burning issue of inflationary pressures, Asha Bangalore (Northern Trust) yesterday remarked as follows: “Inflation expectations as measured by the difference between yields of the nominal US 10-year Treasury note and the 10-year inflation protected security are now at levels seen prior to the onset of the financial crisis in August 2007. As of January 8, the difference between the nominal yield and yield on the inflation protected 10-year US Treasury securities was 245 bps. Inflation expectations have climbed 28 bps during the last 20 trading days.

“The movements of inflation expectations will be watched closely in the near term.  The Fed’s ability to influence the course of economic growth will be prevented if inflation expectations become unhinged,” she said.

The minutes of the December 2009 FOMC meeting indicate that the staff did a special presentation on inflation and inflation expectations. The highlights of this discussion were reported as follows: “Evidence suggested that sizable shifts in the longer-run inflation expectations of households and firms had influenced the evolution of inflation over previous decades; in contrast, the anchoring of inflation expectations in recent years likely had damped somewhat the response of actual inflation to the recent economic downturn and to fluctuations in the prices of energy and other commodities. In discussing these issues, participants noted that they bear in mind the shocks hitting the economy and regularly monitor more than one measure of resource slack as they assess the outlook for economic activity and inflation. They also noted the importance of formulating monetary policy in ways that would work well across a range of possible economic structures rather than relying on any one analytical framework. Finally, they underscored the importance of keeping longer-run inflation expectations firmly anchored to help achieve the Federal Reserve’s dual mandate for maximum employment and price stability.”

Meanwile Peter Boockvar reported on The Big Picture blog as follows: “The 10 yr TIPS auction was good as the yield was about in line with expectations but the bid to cover at 2.65 is above the ‘09 average of 2.59 and the average over the past 2 yrs of 2.30. It’s the 2nd highest going back to 2000. Ahead of the auction, the implied inflation rate in the 10 yr TIPS was 2.45% which means if one believes inflation will run above that over the next 10 yrs on average then buy inflation protection and vice versa.”

“Bullish economic reports are most likely to lead to pressure on long-term interest rates and push inflation expectations into a new range. Having said that, a caveat is necessary, final demand in the US economy is significantly weak and it is unlikely to post robust growth until the final three months of the year. Therefore, it is reasonable to expect that inflation expectations will remain anchored in the months ahead,” concluded Bangalore.

Perhaps, but I am in no hurry to see my gold holdings protecting my portfolio against the biggest monetary reflation in human history.

Tags: Bps, Commodities, Dual Mandate, Economic Activity, Economic Downturn, Economic Growth, Economic Structures, Federal Reserve, Financial Crisis, Fluctuations, Fomc, Gold, Households, Inflation Expectations, Inflationary Pressures, Monetary Policy, Nominal Yield, Northern Trust, Shocks, Slack, Treasury Securities, Us Treasury, Year Treasury Note
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Positives for Gold

Sunday, January 10th, 2010

This article is a guest contribution by Frank Holmes, CEO, US Global Investors (www.usfunds.com).

January 06, 2010

Gold is trending back up as we receive news of greater gold demand and higher inflation risk.

The Bombay Bullion Association says India imported far more gold in 2009 than previously thought. The new figure is 300 to 350 metric tons, compared to the original estimate of about 200 metric tons.

India has historically been the world’s largest market for gold, but its buyers are extremely sensitive to price. It could be a good sign going forward if Indians are strong buyers – they may be thinking that the current price range is here to stay.

I spoke to Josh Lipton at Minyanville this week about my recent trip to India, where economic activity is bustling as confidence returns to the market. Regarding gold, I suggested to him that November’s huge gold purchase by India’s central bank may have played a big role in lifting retail confidence.

Josh also asked me about gold stocks and I said what I always say – the key factors to watch for mining companies are (1) growth in production per share, (2) growth in reserves per share and (3) growth in cash flow per share.

Today’s upward move in gold was credited to rising inflation fears as the U.S. economy recovers. A report came out saying that private-sector job losses in December were the lowest since early 2008, signaling that perhaps the economy is getting better and that inflation could be coming.

We’ll learn more later in the week after the official employment numbers come out, along with the minutes from the latest Fed meeting that may hint toward higher interest rates, which may be a risky move given how fragile the current recovery appears.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be redirected to Minyanville.com. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The following securities mentioned in the Minyanville article were held by one or more of U.S. Global Investors family of funds as of September 30, 2009: Randgold Resources Ltd., Goldcorp Inc., Yamana Gold Inc.

Tags: Bombay India, Bullion, China, Confidence Returns, Economic Activity, Emerging Markets, Employment Numbers, Fed Meeting, Frank Holmes, Gold, Gold Demand, gold stocks, India, Inflation Fears, Inflation Risk, Lipton, Metric Tons, mining companies, Minyanville, Private Sector Job, Risky Move, S Central, U S Global Investors, Upward Move, Us Global Investors
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Velocity of US money supply at long last edging up

Friday, November 20th, 2009

Despite ballooning Fed reserves to bail out banks, money supply as measured by the growth in money supply with a zero maturity (notes and coins, check accounts, savings deposits and money-market accounts collectively) continues to slow.

The slowing growth is contra to what normally happens when the Fed lowers the Federal funds rate.

In real terms the growth rate is also slowing.

The slowing in MZM growth is a consequence of US banks’ tight lending standards. The trend is likely to continue until the banks relax these standards.

Velocity of MZM is at long last picking up after it started falling in the first quarter of 2007 - six quarters before economic growth slumped. The increase in MZM velocity effectively points to increased economic activity. Further increases in this velocity are essential for sustained economic growth.

Bottoms in consumer sentiment and MZM growth coincide, emphasizing the importance of improved consumer sentiment to get the economy going.

Lastly, the US bond market is an excellent indicator insofar as MZM velocity is concerned. Currently the yield on the 10-year note is pointing to further improvements in money velocity. The US bond market therefore also suggests that consumer sentiment is likely to continue improving and that the current improvement in the economy is sustainable, albeit probably at a slow rate.

Note: The source for all graphs is Plexus Asset Management, based on data from I-Net Bridge.

Tags: Asset Management, Banks, Bottoms, Bridge, Coins, Consequence, Consumer Sentiment, Economic Activity, Federal Funds Rate, First Quarter, Graphs, Improvements, Money Market Accounts, Money Supply, Money Velocity, Mzm, Quarters, Sustained Economic Growth, Us Bond Market, Zero Maturity
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FOMC Policy Statement – nature of incoming data allow Fed to wait and watch

Friday, September 25th, 2009

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The tone of the policy statement and details are largely close to expectations. The federal funds rate was left unchanged at 0%-0.25%. The statement reiterates Chairman Bernanke’s opinion that an economic recovery is underway, representing a significant departure from the August policy statement which noted that “economic activity is leveling out.” The outlook for inflation remains favorable in the Fed’s opinion due to “substantial slack” in the economy. In addition, the stability of longer-term inflation expectations was cited to rule out the case of an inflationary threat.

The last paragraph of the Fed policy statement is devoted to the outlook of monetary policy. The Fed left the stance unchanged to read as follows: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The translation here is that Fed is on hold for several months.

The plan to buy mortgage-backed securities of $1.25 trillion is extended to the first quarter of 2010 from the end of 2009. The target amount has not been changed; to date, the Fed has bought two-thirds of the planned amount. The Fed’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. To date, the Fed has purchased 94% of the target.

In the effort to make Fed communication transparent and accessible, I humbly request that this long-winded sentence, which has appeared in the April, June, August, and September statements, be more succinct next time around:

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

Source: Asha Bangalore, Northern Trust Daily, September 23, 2009.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Tags: August And September, Bangalore, Bernanke, Economic Activity, Economic Conditions, Economic Recovery, Fed Policy, Federal Funds Rate, Financial Markets And Institutions, Incoming Data, Inflation Expectations, Monetary Policy, Mortgage Backed Securities, Northern Trust Company, Policy Actions, Slack, Target Range, Term Inflation, Treasury Securities, Trillion
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US vs. Canada in charts: the velocity of money

Monday, July 27th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News ‘n’ Economics blog.

I have received a lot of requests to visit the velocity of money -the rate at which money changes hands. And I thought that it would be instructive to compare the US velocity to another non-QE G7 economy. And since I have a lot of Canadian readers, I chose Canada. The velocity has seriously slipped in both economies.

The chart above (or to the left, depending on your browser) illustrates the MZM and M2 measures of velocity for the US. The quantity theory of money specifies that the velocity of money = nominal GDP/money supply, but I use personal income rather than nominal GDP, as the BEA reports this on a monthly basis. Given a level of money supply, the recent drop in economic activity, i.e., personal income falls, dragged the velocity of money down quickly. It has started to stabilize since March 2009.

Same in Canada: the money supply dropped sharply in Q1 2009 (velocity = nominal GDP/broad money).

Notice that the velocity in Canada has been on a downward trend spanning 1973-2009, however, the negative slope is falling. I am not too familiar with Canada’s velocity (perhaps some of my readers may be more so), but usually a declining velocity of money is associated with a drop in GDP or inflation. I would have to look into this further, but Canada did experience a term of disinflation from the early 80’s to mid 90’s.

Rebecca Wilder

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.