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7.21 weekly market image

Weekly Market Commentary – 07/21/2014

7.21 weekly market imageIs Congress Contemplating QE4?

This past Sunday marked the 45th anniversary of the Apollo 11 moon landing, when American astronauts Neil Armstrong and Buzz Aldrin became the first to set foot on the moon. If they had stayed there, what would their tax rate have been?

The number of U.S. corporations seeking a “tax inversion” seems to be soaring to the moon. An inversion is when a U.S. company acquires another based in a country that has a lower corporate tax rate and moves its tax jurisdiction to that country in order to pay a lower corporate tax rate on profits made outside the United States — profits made inside the United States are still taxed normally.

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Weekly Economic Commentary – 07/21/2014

7.21 weekly Economic  imageBeige Book: Window on Main Street
Modest-to-Moderate Economic Growth Continues

The Beige Book is a qualitative assessment of the U.S. economy and each of the 12 Federal Reserve (Fed) Districts. We believe the Beige Book is best interpreted quantitatively by measuring how the descriptors change over time. The latest edition of the Fed Beige Book, released last Wednesday, July 16, 2014, ahead of the July 29 – 30, 2014 Federal Open Market Committee (FOMC) meeting, once again described the economy as increasing at either a “modest” or “moderate” pace, noting that “labor market conditions improved” but that “several Districts continued to report some difficulty finding workers for skilled positions.” Aside from higher wages to attract talent for these skilled positions, the Beige Book noted that “wage pressures remained modest in most Districts” and that “price pressures were generally contained.” The modest-to-moderate description of the overall economy has now been used in the last 10 Beige Books, and in 11 of the past 12 dating back to March 2013.

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7.14 weekly market image

Weekly Market Commentary – 07/14/2014

7.14 weekly market imageCounting Down the Months

After five-and-a-half years of keeping short-term rates in a range of 0 – 0.25%, many market participants believe the Federal Reserve (Fed) is now about 12 months away from hiking interest rates. This may affect markets in the months and quarters ahead as investors begin to brace for a change in policy.

Over the five-and-a-half years since the Fed took the federal funds rate down to a range of 0 – 0.25% on December 16, 2008, participants in the fed funds futures market have had varying views on when the Fed may begin to raise rates for the first time. Figure 1 shows the number of months until the fed funds futures yield will move above the 0 – 0.25% range priced into the futures market at the end of each month. Figure 1 also shows the 10-year Treasury yield (shown with an inverted scale), revealing how in sync long-term bond yields have been with the outlook for short-term rate moves by the Fed.

With the participants in the futures market pricing in the first rate hike at 12 months away, 10-year Treasury yields should be between 2.5% and 3.0%, based on the past five-and-a-half year relationship between them. The 10-year yield is at the low end of that range now. However, if this relationship persists and the year ends with market participants still thinking the Fed will hike rates in July 2015, the 10-year yield may end this year in a range of 3.0 – 3.5%. Of course, the markets have been wrong repeatedly over the past five years on how soon the Fed may hike rates.

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Weekly Economic Commentary – 7/14/2014

7.14 weekly economic imageGauging Global Growth in 2014 & 2015
Update: Developed Markets Grow, While Emerging Markets Slow

The outlook for global growth is important to investors, since it defines the ultimate pace of activity that creates value for countries, companies, and consumers. This week, as investors begin to digest the S&P 500 earnings reports for the second quarter of 2014, we provide an update on how estimates for economic growth for 2014 and 2015 in the United States and across the globe have evolved over the past few years.

Last week, Christine Lagarde, Managing Director of The International Monetary Fund (IMF), signaled that the IMF would cut its global growth forecasts for both 2014 and 2015, when it releases its mid-year forecast update later this month. Although the release garnered plenty of headlines in the media, the majority of financial market participants took little notice of the report. Why? Because consensus forecasts for global gross domestic product (GDP) growth are available monthly from sources like Bloomberg News, and because markets react to changes in projected paths of economic growth every day amid the daily, weekly, and monthly drumbeat of economic data and events from around the globe.

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