Global Market Commentary

April 07, 2015

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Don’t Fight The Central Banks

European QE is ongoing, and we believe it will have the same effect in Europe that it did in the U.S. — boosting stock prices. We think that dividend-paying exporters will do particularly well. Europe is not the only place where easing is still ongoing. The Bank of Japan is still engaged in the most vigorous QE seen anywhere in the years since the great recession, and the government is pushing state and private pension funds to buy more Japanese and foreign stocks. China has given the world the “gift of easing” in spades; having apparently decided that the most flagrant corruption has been shaken out of the system, it has loosened down-payment requirements for home buyers. The long-term trend in China is towards a consumer-led economy — and the government seems bent on creating a wealth effect by boosting the stock market and channeling savings into equities. That will strengthen consumer spending and consumer optimism. All around the world, the truth is still what it has been during all the years of the current bull market: don’t fight the central banks.

Inflation/Deflation Tug-of-War

Despite ample liquidity from ongoing QE around the world, supply gluts in energy markets, a series of bumper crops in agriculture, and improved manufacturing efficiencies are conspiring with sluggish global demand to keep a lid on prices. Deflation, not inflation, is still the main fear of central bankers from Brussels to Beijing. But with rate rises on the table in the U.S., there is a tug-of-war between inflationary and deflationary macro forces. Expect choppy markets until investors get more clarity on the inflation picture and how fast interest rates will rise… or whether deflation and zero to negative interest rates will dominate.

We read carefully the comments by Fed vice-chairman Fischer — the eminent, wise, and experienced central banker. Mr. Fischer believes that U.S. rates will probably rise late in late 2015. Rates will rise at least partially due to the simple need to get U.S. Fed funds rates above the zero range. Once rates have risen, the Fed has another tool to use for future interventions — that is, lowering rates. We do not anticipate strong rises in U.S. rates. We expect gradual and modest increases beginning late in 2015 or early in 2016. We anticipate that we will see two or three rises of 1/4 percent each, until inflation finds itself above 2 percent for at least a few sequential calendar quarters. Then rates will rise more rapidly.

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