Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Central Bank Round-up

We heard from at least four central banks this week, starting with the Fed on Wednesday. Bernanke reaffirmed the Fed’s commitment to its $85 billion/month bond-buying plan, and kept rates on hold. He totally avoided any talk about “tapering,” but added that mortgage rates have risen and that the risk of disinflation had increased since we are hovering below his 2% objective. Higher interest rates and disinflation taken together are a contradiction in terms, but, like many things today, they pass without question.

As for the other four banks:

  • Canada’s central bank said it may move up its timetable to tighten in coming months, citing improved payrolls here in the U.S. It said this before the employment report took away the basis for such optimism on Friday.
  • China reversed its policy stance, however slightly, injecting $2.8 billion to support money markets. Chinese sentiment indicators (such as manufacturing) improved as a result.
  • The BoE stood pat on its current rate of bond purchases and interest rates. However, its language shifted back in the direction of easing compared to last month’s minutes, which suggested it was souring on QE.
  • Last of all, the ECB, after many attempts to assure that growth was just around the corner, finally steered clear of declaring that a recovery was in progress. Instead Draghi stated that economic prospects must be classified in “very, very unspecific” terms. The ECB kept rates unchanged and accommodative for “an extended period of time.”

MWM 13, 8-2 Box ScoresIn sum, no country in the developed world is tightening its belt on money printing – at least not yet. In fact, we would venture to say that the next move on the table would most likely be an acceleration of current efforts to stimulate – but that may be getting too far ahead of ourselves. In any case, markets reacted in knee-jerk fashion to the news all week. Stocks rallied off of Bernanke’s comments on Wednesday, and struggled following the employment report that fell shy of expectations on Friday. Non-farm payrolls fell short of the 185,000 expected, registering 162,000, even though the unemployment rate fell 0.1% to 7.4%. Away from stocks, Treasury rates rose slightly and the dollar found it difficult to capture gains – which helped stabilize the precious metals by week’s end.

At last count by S&P, 300 companies out of 500 in the index had reported results for the second quarter this year – with 66 percent topping Wall Street’s expectations. However, only four of the index’s 10 sectors are seeing earnings growth, while revenues have grown just 1.7% on an annualized basis. Excluding financials (the best performing sector), revenue gains are 1.2%. Once again, earnings growth, after pulling out all the corporate accounting stops, and having benefited from the Fed’s record stimulus program, is still not able to put Humpty Dumpty back together again. Stocks seem ignorant of that fact for the moment, but won’t remain that way indefinitely.

Next week will be light in terms of economic data, and the earnings season will be winding down. As far as central bank policy is concerned, the die has been cast with respect to easy money – at least until the next Fed meeting in mid-September. Until then, the action in the dollar should be interesting. If the dollar (currently at 81.93) breaks below its 200-day moving average of 81.553, we may see gold make a run in earnest for the 1370 level.

Best regards,

David Burgess
VP Investment Management