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Three banks, one message

Central banks struggle to make sense of it all. The big three (The Fed, the European Central Bank (ECB) and the Bank of Japan) released minutes this week. Japan’s QE is equivalent to 15% of GDP. Even QE3 in the U.S. rarely exceeded 6%, but it at least moved the economy forward. The Japanese economy is stuck at around 0.9% growth. So they left rates at 0.1%. The ECB minutes lamented that “slack was very difficult to measure and was subject to a high degree of uncertainty,” and that its €60bn a month QE was “feeding only very slowly into higher demand”. That’s bank speak for “it’s not really working and it’s not really big enough but let’s keep going”.

The Fed minutes showed a split board but with nerves showing. The data since the meeting (so some producer prices and last week’s payrolls) have weakened the hawks’ hands (talons?) and the Fed futures market did not react. That leaves December a more likely time to raise rates than later this month. One reason the pressure may be off is because of this:

10-Year Treasury Constant Maturity Rate-Consumer Price Index for All Urban Consumers: All Items

Real rates have increased in recent weeks to around 2.1% from 0.9% a year ago. So the real cost of borrowing has risen.

So what does all this mean? Cheap money looks like it’s here for a while longer.

The Earnings Season

Alcoa kicked off the season and threw the kitchen sink at its earnings. China, commodity pricing and global demand were all reasons for a $60m loss compared to a $245m profit a year ago. It’s going to be the same story for many large company earners. Remember, overseas markets account for 40% of S&P 500 companies’ sales, compared to around 13% for the economy as a whole. So, we may hear the global demand and strong dollar explanation a lot.

Bottom Line: we may hit a tough patch in the next few weeks. The market is nervous. But looking to year’s end, we like U.S. stocks. Testing times. But patience usually works.

--Christian Thwaites, Brouwer & Janachowski, LLC

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