The world’s most persuasive central banker, Mario Draghi of the European Central Bank (ECB), announced no rate changes this week. The overnight rate remains where it was a year ago, at -0.2%. Yes a negative rate. It is not alone. The Swiss overnight rate is around -0.74% and the U.S. Treasury recently issued one month bills at 0% (it is not allowed to sell bills at negative rates). But the Euro area has a bad combination of low growth at around 0.4%, low inflation of -0.1%, unemployment over 10% and a larger current account surplus than China, Japan or Saudi Arabia. This explains the strength of the Euro (a current account surplus means excess savings and a demand for the currency) and why Draghi again explained that risks lean to the downside. He hinted they could cut rates further and increase the pace of QE purchases, now at around €60bn a month and 2.7% of GDP to something like €75bn or 3.4%. U.S. QE peaked at more than that but for a shorter period. All this meant that European markets had a good week, up 5% on the week.
Three other things caught our eye.
1. The Debt Ceiling: the Treasury market received an unusual fright when it decided to postpone the 2-year auction because it would not settle before a new debt agreement. The concern spilled into the 1-month bill market, which sold at 0.12%. This may not sound like much until one compares it to recent auctions at 0%. So the debt ceiling scare cost taxpayers nearly $0.5m in additional interest payments. You’re welcome.
2. Earnings: companies reported earnings beats but on low sales increases. Tech companies reported strong numbers, including Google, which announced its first stock buy-back of $5,099,019,513 on a market cap of $480bn. Why so precise? Well, it's the square root of 26 multiplied by $1,000,000,000. Google is now called Alphabet and there are 26 letters in the alphabet. Bless.
3. And one important reason: why companies beat on bottom lines but not on top lines is because of this.
This week’s report showed real earnings struggling to stay constant. Even nominal gains have only put an extra $50 a week into the hands of full-time wage earners over five years. Make no mistake, this is good for equities. Whether it’s good for future economic confidence is debatable.
Bottom Line: We sense a return to confidence in risk assets. But there’s always undependability in the later stages of a bull market. So keep exposure to high quality fixed income.
--Christian Thwaites, Brouwer & Janachowski, LLC
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