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The markets are slightly tilted to higher yields following the release of the number, while stocks are also slightly weaker. Invariably, the number supports the Fed’s ongoing contention that inflation will move towards its 2% target, and at least counters the market’s belief that the Fed will be on hold for all of 2016. The USD is a little stronger after the number, but given the weakness this week (3% move since the start of the week), we are not reading too much into the 0.5% move today. We have seen volatility fall this week, mostly driven by the possible capitulation of Fed rate hikes. If this calm continues, and oil is able to consolidate in the low $30 range, we expect that investors will again need to consider a March or April rate hike. For our part, we will put June on the map as a likely rate hike point which gives the Fed time to analyze its December hike and early year credit conditions. 

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Of course the Fed stands in contrast to these dovish proclamations as it sent a clear message that it wanted to start the rate hiking process this year. The following statement could not have been clearer:

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

Additionally, the removal of specific discussion over global economic and financial market volatility has lowered the bar for hikes, which we thought was raised following the September meetings. The futures markets reflects this new reality, as the odds have risen from 30% before the FOMC meeting to 50% recently. Of course, 50% is far from a rousing endorsement of what the FOMC seems to imply is a sure bet. The recent weakening of data, along with the continued lack of inflationary pressures are two of the larger hurdles that the committee must overcome. Whether Fed lift-off will re-stoke monetary divergence issues is also a concern, particularly given the increasingly dovish positions taken by the global central banking community. A stronger USD, tightening credit conditions, commodity weakness and increased volatility seem to ensue every time we try and go down this rabbit hole. While we acknowledge that the odds of a December lift-off have improved, we remain skeptical over the committee’s verve to actually start the process, as it has flinched during a few opportune moments this year. We are therefore sticking to our March, 2016 guess for lift-off, having lost a bit of faith after the September meeting.

We also view some of the recent Fed rhetoric as preserving the opportunity for a December hike, which would have been challenging if the market continued to assign low odds on that event. Instead, we have seen rates higher over the past week, with the belly underperforming the wings as the curve have steepened through the belly, while remaining mostly unchanged though the long end. This is likely due to the overly benign hiking expectations assigned by the market, with the Fed guiding to 5 hikes by y/e 2016 and the market expecting only 2 prior to last week’s meeting. While that gap has now closed to three expected hikes, continued market stability should continue to narrow this gap via higher yields. Global rates have also generally risen over the past week, although EGBs mostly reversed the rally they experienced following the ECB meeting a few weeks ago. Currencies have been mostly unchanged since the FOMC, with the ECB meeting having a much bigger influence on strengthening the USD and weakening the Euro. Recent comments from Mario Draghi have been somewhat conflicting, saying that further stimulus is an “open question” over the weekend, while today reaffirming their willingness to act at the December meeting if needed. We get the sense that these are trial balloons that may lead to market disappointment given how consensus firmly expects addition QE to come from ECB’s December 3rd meeting. The Euro bond markets have been whipsawed on these contrasting statements, the 10y Bund trading down to 20 bps to 42 bps just after the ECB, but rising back to 58 bps after this Draghi’s weekend comments. The Euro has traded between 1.09 and 1.13 over the past 2-weeeks, and is presently weakening back to the low end of that range.

Equities have been the strongest performers over the past several weeks, as most U.S. stock indices are now positive for the year. The post-ECB stock rally was driven by the safest sectors, with healthcare, technology and financials leading the rally though mid-October move. More recently, however, it has been all about energy, with that sector up 6% over the past week alone. Oil has helped, stabilizing in the upper $40 range, while the brent/wti spread has been mostly unchanged. We are therefore back to levels last seen just before the Chinese government devalued the Renminbi. The strong performance of stocks is especially impressive given the generally weak results from corporate America during earnings season. While approximately 70% of companies are beating expectations, revenues are missing expectations almost 60% of the time. Earnings also look set to fall on a y/y basis for a second consecutive quarter, while current quarter expectations call for yet another decline in earnings. Since there are limited earnings next week, we expect that current results will hold steady through the end of the reporting season.

The risk rally has also spread into the fixed income markets, with high-yield, preferred and emerging market debt posting 2%-3% total return gains during October. The broad aggregate was mostly unchanged, while generally higher yields pushed the treasury index into negative territory (-0.4%) for the first time since June. Most of the other fixed income asset classes were flat to slightly positive for October, while YTD returns are not much better, although many bond classes are still outperforming the S&P for the year. Corporate spreads have been generally stable over the past few weeks despite a strong finish for new issuance at the end of the month. Monthly investment grade issuance exceeded $100 billion, setting yet another monthly record. November has seasonally been an active period for the primary market, with $112 billion average over the past 3-years. With rate hike expectations rising, continued M&A activity, and a reportedly robust calendar, we would expect to exceed $100 billion again this month. This will likely cap much more spread compression, although think we have seen the wides of the year. High-yield also continues to rally, buoyed by strong inflows into the asset class.

All of this points to fairly well behaved capital markets, which strengthens the odds of a December rate hike. We nonetheless remain data dependent, with Friday’s employment report the spot light for the week. Recall that non-farms have disappointed for 2-consecutive months, with last month’s +142,000 widely missing expectations, while also not containing the expected positive revisions to August. The current consensus expects +180,000 jobs for the month, with positive revisions also expected for September’s data. Various fed speakers have talked down employment expectations recently, citing the need for only 120,000 thousand jobs to maintain the unemployment rate. Average hourly employment has become increasingly important as the market searches for wage inflation, so look for a rebound from the 0% reading last month. There is limited data next week, with the bond market closed on Wednesday for Veterans Day. The key releases next week will be retail sales next Thursday and Michigan confidence on Friday.

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Actually, Mr. Floden is also scheduled to speak this coming week at a breakfast meeting in which he will deliver a speech entitled “Sweden needs its inflation target”. Whilst we look forward to hearing what Mr. Floden has to say on the matter, we would like to pre-empt it with our own penny’s worth. Indeed, we have long argued that the one agenda item conspicuously absent from the “truth and reconciliation” of this Crisis era has been the role of central banks and the merits of plain-vanilla inflation targeting. For a central bank solely mandated to meet an inflation target, asset prices only matter in as far as they can be expected to impact upon goods and services prices over a specific time frame; but if, for whatever reason, the two series diverge, then identifying the moment when associated leverage adopts a destabilizing trajectory is simply inscrutable, a matter of pure conjecture and hence open to political influences. We could have learnt from Japan’s seminal experiences in the late 1980s during which time CPI inflation barely rose above 1%; but two decades later, and the West’s predicament could be attributed to the same delusion of ‘price stability.’ In short, stable CPI inflation is a necessary but, in itself, insufficient condition to ensure macroeconomic stability, and appearing on the stand for the prosecution is none other than the biggest financial crisis in history.

The only way forward, we suspect, is for a more concerted focus on financial stability as part of central bank mandates: a number of banks, such as the RBNZ and BOE, have recognized this need, and we recall the RBA’s Glenn Stevens stating in 2013 that central banks ‘should be prepared to take the heat out of asset price booms, rather than relying on low rates to clean up the mess after the bubbles burst.’ The comments were remarkable in that they could very easily have been borrowed directly from a speech made by former ECB chief economist Otmar Issing at an IMF conference earlier that year. Issing said, “… if [it] is your position, that monetary policy should deal with asset prices only on the way down, it is a totally asymmetric approach … Price stability and financial stability must not be seen as a trade-off. We have to deal with financial stability in the context of monetary policy that is geared to maintain price stability.” Of course, focusing on financial stability is one thing, but we have yet to see some sort of nominal target that can in some way quantify risks, say, associated with house price inflation and corresponding indebtedness. Political will notwithstanding, whether this could ever be formulated in a meaningful way is another matter; but we live in hope.

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Some of the headlines generated by the equity markets included an opening plunge of over 1,000 points on August 24th, which has been followed by 200+ point daily moves in 6 of the past 8 trading days. Oil has been a litmus test for global growth all year, and we have seen both Brent and WTI retest their YTD lows only to be followed by the largest rally in 25 years at the start of the week. This has been subsequently followed by an almost complete reversal the following day (we are currently at last Friday’s levels as we write this). Whether this level of acute volatility is the new normal during strong risk-off periods has been a growing concern for investors all year. For our part, we are in the camp that this is the new normal as the currents created by central bank policy, evolving liquidity dynamics and changing global reserve management makes their way through the investment process. Our observations are that while we have been aware and discussing each of these issues in isolation over the past year, China and Fed rate hikes amid growth concerns has been the catalyst needed to expose the current market structure. 

We find it ironic that over the past year we have found ourselves writing about either the lack of volatility or massive disjointed spikes in price moves. To us, this indicates that crowded trades, or herding has become the norm during periods when the put option offered by central banks is a widely-held view. Of course a turn in that view has led to the stampede mentality that we have witnessed during risk-off periods. Layering on the evolving liquidity dynamics created by greater regulation, more limited dealer balance sheets, and new investment vehicles exacerbates the volatility issues during stressed market periods. Finally, while we continue to debate the timing of Fed lift-off we are reminded that there is a natural tightening process underway as CB balance sheet holdings naturally roll-off and international reserve balances decline.

Most asset classes posted negative returns in August, although global equities have been the clear underperformer. The market volatility has driven U.S. stocks back to last fall’s levels, reversing the mostly flattish returns that they have posted for most of the year. With the S&P down 6% on a YTD basis, U.S. stocks remains the laggard amongst most of the developed markets. Recent losses have been most acute in the Asian markets however, as the regional impact of China’s policy woes has had a more direct impact on these exchanges.

A similar pattern has emerged in the currency markets, with the weakening USD vs most of the majors emerging since August driven by lower odds for a September rate hike. The largest moves have been in EM currencies however, with the 2.5% decline in CNY translating into 10+% falls in MYR and IDR. The resumption of falling oil and commodities has driven relatively large downward moves in the ZAR, AUD, and NZD, with the latter 2 currencies feeling the double whammy of China and lower commodities. We will note that while oil retested YTD lows, it has traded down 7% since the July FOMC meeting but is mostly unchanged since the CNY announcement.

From a rates perspective, the MOVE index has been the least volatile over the past month, with treasury yields marginally lower, but remaining within the post July FOMC range of 2.0% to 2.25%. The curve is also mostly flatter, as rate hike expectations has kept the short end within a fairly tight range. It is interesting to note that EGB yields were mostly higher during August.

Given global volatility and the decline in oil prices the odds of a September rate hike have declined significantly over the past few weeks. The futures market presently assigns just 35% odds that the FOMC will begin the liftoff process in September. Those odds increase to 61% in December, indicating that most investors still expect the Fed to act sometime this year. Fed speak continues to support the facade that many on the FOMC hope to be able to hike rates this year, with recent comments from Vice Chair Fischer, and regional Fed presidents Mester and Bullard indicating a continued desire to hike rates this year and possibly as early as September. Other commenters, however, have not been as forceful, with NY Fed President Dudley appearing much more on the fence after recent bouts of volatility, while Boston Fed’s Rosengren was neutral on September in our view. There is no press conference in October, and December risks include year-end influenced flows and the possibility for weather impacted data. Of course, Bernanke chose to begin the tapering process in December, 2013, after head-faking the market in September, so anything is possible.

What we do know is that there is limited data between now and the September 17th FOMC rate decision for the Fed to debate. We of course have the non-farm report this coming Friday, with consensus at +218 thousand, essentially unchanged from the prior month. It is worth noting that the survey week used for the upcoming report occurred on the week that China altered its FX policy, so any subsequent market induced volatility will not be captured in the employment data. Corresponding weekly claims data tells a similar story, with reported claims during the survey week remaining near the lows of the summer. Other data has also remained consistent with the moderate growth, stable consumer and muted inflation discussion that has been in place for the past several months. We therefore do not expect the data to provide much additional granularity for either the market or the Fed to chew upon, which makes market volatility the primary determinant for short term lift-off views. From this perspective, we suppose we will just have to wait and see, although lower equity prices (within reason) are not likely a major concern for the Chairman Yellen, who raised valuation flags earlier in the year. For our part, oil remains the key asset class in influencing the timing of lift-off, with stability at current or higher levels supporting an earlier move.

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What Is A Money Market Fund

Developed in the 1970s, money market funds allow investors to purchase a pool of securities that generally provide higher returns than interest-bearing bank accounts. Consisting of high-quality, short-term debt, the funds are traditionally very stable. The purpose of a money market fund is to maintain a value of $1.00, so when you invest $1.00, you receive $1.00 back on demand plus a small amount of interest earned.

Fractional increases and decreases occur, but generally the value does not move and investors consider the fund to be equal to cash. When a fund’s value deviates more than 0.5% from its $1.00 share price, the fund is allowed to re-price at its market value. At this time, an investor will not receive the entire $1.00 back – this is referred to as “breaking the buck”.

In 2008, at the height of the financial crisis, one money market fund “broke the buck” causing investors to pull their money out in mass. While penny moves may seem minor, money market funds are perceived as extremely safe and small declines strike fear. As a result, investors pulled out approximately 14% of their total assets – about $300 billion. This caused the U.S. Treasury to step in and provide a government guarantee and also prompted the SEC to evaluate the need for money market fund reform.

Floating Net Asset Value

As a result of the vote in July, prime institutional money market funds will be required to transact at a floating NAV, not at a $1.00 stable share price. This aalternative is designed to address the heightened incentive shareholders have to redeem shares in times of financial stress. The SEC also believes that this action would improve transparency of money market fund risk through more visible valuation.

Liquidity Fees and Redemption Gates

To further limit redemptions, if a money market fund’s level of weekly liquid assets were to fall below 15% of its total assets, the money market will have to impose a 2% liquidity fee on all redemptions. This fee can be avoided if the fund’s board of directors determines that such a fee is not in the best interest of the fund.

READERS:  While you may not invest in prime institutional money market funds directly, the result of the regulation will still impact you.  Large companies primarily invest their short-term in money market funds.  The money is needed for operational purposes, so short, liquid investments are needed. If these companies incur greater accounting costs or are forced to look towards alternative investments with lower returns, the impact to consumers may be minor, but it will be felt.

What are your thoughts on the new MMF fund regulation?  

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With life being fairly uncertain, a car accident can throw your life in a downward spiral. The intensity of the accident is hardly of essence since whether it is a trivial or a major car accident, the immense amount of stress that the human body and mind goes through is indescribable. It is essentially something that stays with you for the longest period of time, its dark shadows never leaving your side. The only consolation at this stressful time is perhaps, the submission of an insurance claim that gives you peace of mind and a ray of hope that at least the physical damage that your beloved car had to go through will be taken care of and you won’t have to suffer quite as much financially. However, if this is your first time dealing with insurance claims, you must be mentally prepared that it could be a daunting task as there could be several formalities involved. You can visit http://cheapautoinsurance.net/ to get a fairly rough idea of the various aspects of insurance that you must first familiarize yourself with and other such formalities that may come handy. Besides, reading through this list given below will build up your confidence and give you a fair picture of what to expect when you wish to get your first claim on your auto insurance.

1. How to commence the car insurance claim:
2. Whether you submit the claim via the internet or the telephone, you will be asked to enter certain details pertaining to your insurance policy like the insurance policy number or your social security number or any such detail that will prove that you are a customer with that particular insurance company.
3. While the process of the claim may seem intimidating, you must take into consideration the fact that several car insurance companies are now realizing the hardships that their first-time customers have to go through when it comes to getting their claims and therefore, they have come up with different techniques that help ease their burden. For instance, in the earlier years, when a claim had to be submitted in the event of an accident, a customer had to call up on their toll-free number and get in touch with a customer service executive who would take the request forward. However, keeping in terms with the modern technology, today, customers can directly submit a request online.
4. The basic information you are expected to supply:
5. You are also required to furnish information on the car driven by the other party involved in the accident along with details of the police complaint from the police station if they have been involved.
6. Based on the company with which you have registered, the requirements for the claim will differ widely. However, every insurance company is likely to expect you to supply them with some basic information that is related to the accident in question and the policy that you have taken from them. Therefore, the first thing you should provide them with is your policy number followed by details of the accident. As a rule of thumb, it is important to offer them details that speak of the date and time of the accident and the location where it took place. It would be a plus if you could be descriptive of the accident.
7. What happens after the claim has been filed:
8. An insurance adjuster is appointed to look into the claim that has been filed and to make sure that the details have been provided accurately and then the decision is made.

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First, the end of the “Goldilocks” period that began in mid-2012 meaning that at least some major Central Banks are forced to think about scaling back monetary accommodation in the face of medium term inflation pressures. The “Goldilocks” period can be described as an era of accelerating AE growth combined with flat to lower inflation. Banks most likely to scale back are the BoE and the Fed.  However, the recent FOMC suggests that at least the Fed is not there yet.

Second, supply shocks could generate higher oil prices which would be a significant threat to the economic recovery both in advanced and emerging economies. In some cases, higher oil prices are not always bad for economies and markets. If real GDP growth is on a strong trend already, higher oil prices, better economic and earnings data, stronger demand for energy and higher equity markets can all co-exist nicely.  For historic examples, look at the period from 1999 – 2000 or 2005 – 2006. Contrary to those periods, when oil inflated oil prices result from supply shortages, both the reduction in quantity and the higher prices will tend to hit economic activity.  According to the chart below, every US recession bar with the exception of one since the mid-1970’s has been associated with a spike in oil prices…

Since the end of 2011, the correlation between equities and oil has been near zero. This was not the case over 2010 – 2011 as quantitative easing and liquidity drove returns in all asset markets concurrently. While the correlation remains at these levels, oil futures or even commodities are a solid way to diversify a portfolio and hedge equity positions.

There is still a real risk of serious disruptions to oil supplies in Iraq.  The ISIS/ISIL forces have experienced limited success in the oil fields to the North, while fields to the south are under threat.  The international community, including the US, has no appetite for direct military intervention at this time.

In general, it feels like oil markets are already tighter than many forecasters thought about 6 – 12 months ago. The prevailing softness coupled with supply shock in Iraq would raise the risks considerably as Iraq current outputs about 3.2 million barrels per day or roughly 9% of the OPEC total. There is more spare capacity available elsewhere but it is concentrated in countries like Libya and Nigeria where geopolitics are also playing a role in constraining supplies.

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Take a look at the infographic below and tell me what side you belong to. Do you believe that the Fed should continue at the current rate of QE reduction and slowly raise rates over the next year or is the economy too fragile at this point?

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