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Friday
Nov. 20, 2015
www.bloombergbriefs.com
Draghi Hints at Stimulus; Fed's Bullard, Dudley SpeakBEN BARIS AND ALEX BRITTAIN, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: Expectations have grown for further easing next month by the after President said policy makers will act to European Central Bank Mario Draghi
raise inflation "as quickly as possible" (read analysis ). The fell for the first here euro time in three days. Draghi's deputy, , may clarify the bank's plans Vitor Constanciofurther when he speaks at 8 a.m. In the U.S., President St. Louis Fed James Bullardspeaks at a business event at 9 a.m. Bullard will vote on the FOMC from January. Fed Vice Chairman speaks about the U.S. economy at 11:15 a.m.William Dudley
ECONOMICS: India's central bank Governor said the country's Raghuram Rajanbad debts are a problem that need to be cleared up.
GOVERNMENT: Today is the deadline for the and to resolve U.S. House Senatedifferences between their proposals and pass a six-year highway funding measure. The current short-term funding measure expires at the end of the day.
MARKETS: climbed for a second day, recovering from the lowest since Commodities1999. extended their best week since October.Emerging-market stocks
(All times local for New York.)
(Correction: An earlier version of this chart mischaracterized the level of price change.)
COMMENTARY IN THIS ISSUE
The ’s message for the Fed stock markethas been that slow and steady on interest rates is preferable to fast and furious. History not only backs that up, it also shows the margin of victory can be wide: Kate Garber.
Declining are a harbinger of utility stocksrate increases, and the S&P's Utilities Index is trading near levels last seen the day before the Fed's September rate decision: Jim Polson.
Mario Draghi's warnings earlier today about low euro-area inflation add to expectations the European Central Bank will expand its stimulus efforts in December: Maxime Sbaihi.
Blackstone Group Vice Chairman John Studzinski discusses investment globalstrategies, internal rate of return, and European banking: Tom Keene.
NUMBER OF THE DAY
118 years — The time it will take before men and women earn equal pay, based on the current rate of convergence, according to a World
report. Women today Economic Forumare being paid the average wage men earned almost a decade ago. The report measured the gender gap in 145 nations.
QUOTE OF THE DAY
"If you want to protect the independence of monetary policy, then the Fed chair should be vocal about where the line is, what you can fix, and what you can’t."
— Mark Calabria, director of financial regulation
studies at the Cato Institute, on how the Fed
should with fiscal policy makerscommunicate
MARKETS & RATES KATE GARBER, BLOOMBERG NEWS
Budget-Busting Childcare Costs the Talk of Campaign Trail
It’s not just going to be about employment, wages, and income inequality. U.S. presidential candidates are also delving into the topic of budget-busting childcare costs to win over voters. Policy makers are responding to the cries of parents who are forced to choose between paying childcare bills, which have climbed more than twice as fast as overall inflation since the end of 1990, or foregoing work. The soaring costs crowd out other forms of household spending, distorting the biggest part of the U.S. economy. “We’re going to hear more about this, especially as we get closer” to the election, “Across the board, you’ve seen more people acknowledge that this is really, fundamentally a family economic issue,” said Heather Boushey, chief economist at the Washington Center for Equitable Growth, which focuses on the impact of income inequality. Read the full story .here
— Michelle Jamrisko, Bloomberg News
Nov. 20, 2015 Bloomberg Brief Economics 2
MARKETS & RATES KATE GARBER, BLOOMBERG NEWS
History Shows 'Slow and Steady' Is Best Rates Mantra for StocksThe stock market’s message for Janet
Yellen has been that slow and steady on interest rates is preferable to fast and furious. History not only backs that up, it also shows the margin of victory can be wide.
U.S. stocks have gained an average of 11 percent over a year’s time when the Federal Reserve takes a gradual approach to raising lending rates, according to data from Ned Davis Research. That compares with a 2.7 percent average decrease during faster rate cycles.
That could be good news for equity investors over the next 12 months, as Fed Chair Yellen has stressed the central bank intends to move cautiously in implementing the first rate increases since 2006. Stocks have been whipsawed over the past several months as investors have scrutinized each clue from Fed officials on the timing and pacing of rate hikes.
“Fast sends a message to the market that we’re behind the curve. Slow just says we’re following economic conditions,” Mark Kepner, an equity trader at Themis Trading LLC in Chatham, New Jersey, said by phone. “It would be worrisome for the market to think the Fed is behind the curve with something like inflation.”
The data from Ned Davis show that there hasn’t been a “slow” cycle since the late 1970s. During a slow cycle, in which the Fed skips meetings between rate increases, the S&P 500 rises on average around 11 percent one year later. During a fast cycle, when the Fed raises rates at each meeting, the benchmark index declines a few percentage points on inflationary concerns.
The fast approach can result in a severe reaction by equities markets. In January 1973, the Fed lifted rates swiftly
in the wake of an OPEC oil embargo on the U.S. The federal funds target rate was raised 15 times through August. The S&P 500 benchmark index plunged 20 percent in the 12 months following the initial rate move.
Stocks reacted better when the Fed increased rates in August 1977, moving at a gradual pace as the Paul Volcker-led committee aimed to combat inflation. The central bank left rates unchanged in November and December, and kept them steady for three months after a January increase. The S&P 500 was up 7 percent a year after the August rate hike.
The 1977 move was followed by progressively steeper rate increases that subsequently weighed on equities. The fed funds rate spiked from 10 percent in September 1980 to 20 percent by the end of the year as the economy entered a recession. The S&P 500 lost 8.6 percent over the 12 months.
Investors are betting the next rate cycle will be less volatile. Minutes of the Fed’s
latest meeting released Wednesday signaled policy makers think the economy is strengthening enough to withstand higher interest rates as soon as next month, while stressing the pace of any increases will be gradual. The S&P 500 jumped 1.6 percent on the news.
Moving slowly after liftoff would give policy makers time to assess the impact of higher rates on the economy and reduce the chances they would overshoot and raise rates too high, Fed Bank of Boston President Eric Rosengren said earlier this month.
“I view the likelihood of this being a slow cycle as a marginal positive for the market,” said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. “The Fed is likely to be more methodical this time. It’s the Fed choking off liquidity historically that has led to market trouble and economic trouble. That doesn’t appear to be the case this time.”
— With assistance from Christopher Condon.
EUROPEAN CENTRAL BANK MAXIME SBAIHI, BLOOMBERG INTELLIGENCE ECONOMIST
U.S. Stock Reaction to Fast Versus Slow Rate Hikes
Nov. 20, 2015 Bloomberg Brief Economics 3
EUROPEAN CENTRAL BANK MAXIME SBAIHI, BLOOMBERG INTELLIGENCE ECONOMIST
Draghi Running Out of Patience on InflationMario Draghi seems to be in a hurry.
He made it clear today that inflation is not accelerating as quickly as he would like and that the European Central Bank is ready to do more about it. The ECB president is raising already-high expectations for a new round of stimulus as soon as December. A change in the dimensions of quantitative easing is the most likely option at this stage.
Euro-area inflation isn’t moving fast enough toward the ECB’s mandate of 2 percent. Speaking today in Frankfurt, Draghi said, "If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible." Inflation stood at 0.1 percent in October.
That wording, combined with the likelihood that underlying inflation will be weaker than previously expected, is a dovish signal that hints at further stimulus coming when the ECB meets again in two weeks. On Nov. 12, before a committee of the EU Parliament, Draghi already worried openly about the inflation outlook, saying "signs of a sustained turnaround in core inflation have somewhat weakened." As the October minutes showed yesterday, the Governing Council Policy discussed "the loss of momentum in the turnaround of various indicators of underlying inflation, with inflation excluding food and energy appearing to be stuck at below or around 1 percent."
ECB members are focused on core inflation. "Low core inflation is not
something we can be relaxed about," Draghi said today. Headline inflation will become a less relevant — or misleading — gauge of price pressure as it starts to rise artificially on base effects. According to BI Economics calculations, it should even reach 1 percent in January before falling back again. When correcting for the external effects, the domestic price pressure remains weak. While the recovery seems to be holding, its pace appears too slow to soak up the abundant slack remaining in the euro-area economy and lift underlying inflationary pressures in a reasonable time frame. With unemployment still at 10.8 percent in the region, labor-market conditions are hardly
helping to do that. That’s what Draghi meant when he said today that "the economy needs to move back to full capacity as quickly as possible" for nominal wages growth to pick up.
Since the program was implemented, it has become clearer that the existing scale of purchases will be insufficient. ECB members are acknowledging that more needs to be done. Some of them even wanted to act as soon as the October meeting. The expectations for a move at the next meeting on Dec. 3 have never been so high. From the minutes, a change in the pace and/or scope of the asset purchases seems to be the ECB members’ preferred option.
Core Inflation Stuck Around 1%
Nov. 20, 2015 Bloomberg Brief Economics 4
INTEREST RATES JIM POLSON, BLOOMBERG NEWS
Nov. 20, 2015 Bloomberg Brief Economics 5
INTEREST RATES JIM POLSON, BLOOMBERG NEWS
Utilities Are Trading Like the Fed's Raising Rates TomorrowDo you remember that time in
September when U.S. utility stocks were down on expectations of a Federal Reserve rate increase? Well, it’s happening again.
The 29-company Standard & Poor’s Utilities Index is trading near levels seen Sept. 16, a day before the Fed left rates unchanged. The Federal Open Market Committee’s next decision on rates is due Dec. 16.
Declining utility stocks are a harbinger of rate increases as the sector tends to underperform the broader market when rates are rising, Kit Konolige, a Bloomberg Intelligence senior utilities analyst, said by phone Nov. 16. Raising rates “may well become appropriate” at their December meeting, the FOMC said in minutes of the October meeting released Wednesday.
“The expectation that’s priced in is materially higher short-term rates,” Hugh Wynne, a New York-based analyst for Sanford C. Bernstein, said by phone Nov. 16. “This is probably the most well-anticipated interest rate increase in the history of the republic.”
Markets are expecting a 50 basis points to 75 basis points increase within 18 months, Wynne said.
The average utility dividend yield has risen to 4.02 percent from 3.96 percent on
Sept. 16, another sign that investors expect a rate increase. It had dropped to 3.68 percent on Oct. 22 after the Fed left its target rate at zero percent to 0.25 percent.
There’s no short-term risk to utility profit or cash flow from a modest rate increase in December, Bloomberg Intelligence credit analyst Jaimin Patel said by phone Nov. 17. Rising interest rates, combined with more expensive natural gas and flat demand for several years, may challenge
utility profits, he said.Many utilities are forecasting profit
growth will outstrip sales. They propose spending more on plants, wires, and pipes for which they receive a regulated rate of return. That’s been easy when cheap credit and falling energy prices held down customer bills, Patel said. Regulators will be less willing to raise bills for new investment when energy prices are already driving them up, he said.
GENDER EQUALITY
The Sector Lags Behind Broader Market, Anticipating a Hike
Nov. 20, 2015 Bloomberg Brief Economics 6
GENDER EQUALITYThe World Economic Forum has released its , showing women’s pay finally equals men’s pay Global Gender Gap report for 2015
from 2006. , head of employment and gender initiatives at the WEF, spoke with Bloomberg Radio’s Taylor Riggs on why Saadia Zahidithe global gender gap across health, education, economic opportunity and politics only closed by 4 percent in the last 10 years.
Q: What are the report's key findings?A: We are finding that in 10 years there has been relatively little progress, but where we are today has set up women quite well in terms of having almost closed health gaps and education gaps. Where we’re seeing the persistent gap is in economic participation and political empowerment. In the last 10 years, those health gaps have pretty much stayed the same. Education gaps have narrowed slightly. Economic participation gaps only narrowed by about 3 percent and on political empowerment, it’s been almost 9 percent that the gap has closed.
So progress overall for the world is quite slow but there are pockets where the pace of change is relatively fast. And that’s happening both at the top of the ranking and the bottom of the rankings.
Q: Women now earn what men did back in 2006. Why is the wage gap so persistent?A: In fact if we adjust for inflation, women still haven’t caught up with what men used to earn in 2006. But if you look at the nominal numbers, they have finally reached parity, but where men used to be 10 years ago. Why it’s so persistent depends on a number of different factors. One factor is women tend to be in those professions that are lower paid.
Now there’s a debate around are they lower paid because women tend to be the majority of those professions? Or are they simply lowered paid professions. A second aspect is actual discrimination in terms of women’s wages compared to men’s wages. We’ve been asking for the last 10 years CEOs through a survey if women and men are earning differently for the same job. And regardless of where the responses come in from the world, we have never had an answer that points to parity. So there is that continued wage gap even for the same job.
Q: How has the educational gap improved?A: This is an area where the world has made a lot of progress. We can see progress in the last 10 years but this is change that has been around for longer. Today in almost 100 countries there are
While the employment rate of Japanese women ages 15 to 64 has inched up to a record 65.4 percent
(it’s 82.3 percent for men), full-time female workers on average still earn about 30 percent less than
males, according to government data. The pay gap is the third widest among members of the OECD.
The issue is not so much that women with equal skills and experience are paid less than men who do
the same job — Japan is making efforts to improve this — it’s more about the kinds of roles and
opportunities that are available to them. Read the full story .here
— Yoshiaki Nohara, Bloomberg News
more women enrolled in university than men. So the future of the global skilled workforce is overwhelmingly female.
Q: How has political empowerment improved among countries?A: That’s the area that’s made the most progress in absolute and relative terms over the last 10 years. But we’re starting from a very low base. And so the political empowerment gap had only been closed by 14 percent.
There’s obviously a representation issue. Women make up one half of the population so their leadership should be one half female. But there’s also an economic incentive for ensuring there are more women in political representation. There’s a lot of evidence that shows countries that have equality in terms of political empowerment tend to be more economically inclusive. There’s evidence to show that when women take budget decisions, they are taking it with a different set of criteria in place. So there’s
a value case as well as an economic and distribution case.
Q: Broadly speaking, what nations are the most gender equal?A: So we’re trying to assess how those countries are distributing those opportunities and resources between women and men. When we look at the gap that way, Iceland is the highest ranking country, followed by a few of the other Nordics — Norway, Finland, Sweden. These are countries that have closed over 80 percent of the gender gap but none of them have reached parity. Then countries like Rwanda and the Philippines and South Africa are all lower income countries that have made it into the top 20. So relatively speaking they are distributing education, health, economic and political opportunities more equally.
Q: Where does the U.S. rank?A: The U.S. is at 28 out of 145 countries that we’re covering. This interview has been edited and condensed.
DATA & EVENTS
Pay Gap Persists as Japanese Women Join Workforce
Nov. 20, 2015 Bloomberg Brief Economics 7
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
8:30 Canada Retail Sales MoM 0.10% 0.50%
8:30 Canada Retail Sales Ex Auto MoM -0.40% 0.00%
8:30 Canada CPI NSA MoM 0.10% -0.20%
8:30 Canada CPI YoY 1.00% 1.00%
8:30 Canada Consumer Price Index 127.1 127.1
8:30 Canada CPI Core MoM 0.20% 0.20%
8:30 Canada CPI Core YoY 2.00% 2.10%
8:30 Canada CPI SA MoM 0.10% -0.20%
8:30 Canada CPI Core SA MoM 0.20% 0.10%
9:00 Mexico Economic Activity IGAE YoY 2.60% 2.58%
9:00 Mexico GDP NSA YoY 2.40% 2.20%
9:00 Mexico GDP SA QoQ 0.60% 0.50%
9:00 Mexico GDP Nominal YoY 5.90% 5.60%
10:00 Euro Area Consumer Confidence -7.5 -7.7
11:00 U.S. Kansas City Fed Manf. Activity 0 -1
14:00 Argentina Economic Activity Index YoY 2.50% 2.60%
16:00 Colombia Trade Balance -$1,260 -$1,433.60
16:00 Colombia Imports CIF Total $4,420.50 $4,438.30Source: Bloomberg. Surveys updated on 11/20/15 at 5.48 a.m. New York time.
CALENDAR
BLOOMBERG NEWS
OVERNIGHT
Britain recorded the largest budget for any October since 2009, deficit
dealing a blow to Chancellor of the Exchequer George Osborne less than a week before he unveils a key fiscal statement. Net borrowing excluding public-sector banks was 8.2 billion pounds ($12.5 billion) compared with 7.1 billion pounds a year earlier, the Office for National Statistics said. The figures set the stage for the Autumn Statement and Spending Review that Osborne will announce on Nov. 25. Commitments to increase spending on security in the wake of the Paris attacks and plow billions into infrastructure will come against a backdrop of further cuts to government departments as Osborne seeks to deliver on a commitment to return Britain to surplus by 2020.
Nationwide, the U.K.’s second-largest mortgage provider, said lending increased 14 percent in the first half, fueled by loans to landlords in the nation’s booming housing sector. Gross lending increased to 14.9 billion pounds ($23 billion) in the six months through September from 13.1 billion pounds a year earlier. Buy-to-let lending jumped 32 percent to 2.9 billion pounds, representing a 15 percent share of the U.
England Governor K. market. Bank of Mark Carney has said regulators are closely monitoring a boom in the buy-to-let sector amid concerns it could pose a risk to financial stability.
China sold 50-year sovereign bonds at a record-low yield, after a series of central bank rate cuts drove benchmark borrowing costs to the least in history and an aging population spurred speculation of further easing in the long term. The finance ministry auctioned 26 billion yuan ($4.1 billion) of debt on
couponFriday at a of 3.89 percent, the lowest since sales of the tenor began in 2009. The yield was lower than that of the previous sale in May as well as the rate in the secondary market.
Europe
Asia
MARKET INDICATORS
Americans' Economic Outlook Holds Near 13-Month Low
One in five Americans in November said the economy is improving, matching the smallest share in two years and keeping a monthly gauge of expectations close to a 13-month low. The measure tracking the economic outlook was little changed at 42.5 last month after an October reading of 42, which was the lowest since September 2014, data from the Bloomberg Consumer Comfort Index showed Thursday. While 20 percent of respondents said the economy was getting better, 45 percent viewed it as staying the same, the largest share since February 2012. Read more .here
— Ali Donaldson, Bloomberg News
Nov. 20, 2015 Bloomberg Brief Economics 8
MARKET INDICATORS
SURVEILLANCE WITH TOM KEENE
Source: Bloomberg. Updated at 5:50 a.m. New York time.
Nov. 20, 2015 Bloomberg Brief Economics 9
Bloomberg Brief: Economics
SURVEILLANCE WITH TOM KEENE
John Studzinski, vice
chairman at Blackstone
, spoke with Group
Bloomberg's Tom Keene and
Francine Lacqua about global
investment strategies,
internal rate of return, and
European banking.
Q: What is your global strategy for long-term investing?A: If we're talking about investing today in terms of where we look at the world in terms of long-term investments, five, 10, 15, 20 year money, you would look fundamentally at certain parts of Europe still. There's a lot of interesting real estate in Europe whether it's in the U.K. or Spain. And there are other businesses in Europe that are also interesting. But because of the geopolitical tensions that you've seen in the last week, a lot more money will flow into the dollar. A lot more people will flow into the stock market and the U.S. will have what I call a geopolitical premium in the short-term. But that doesn't mean you have to separate what's a good place to invest. And I would
say that Europe is on the margin, probably very positive.
Also let's remember, if we're talking about five, 10, 15, 20 years, real estate in Brazil, Brazil is still a very powerful country. It's having some real serious problems right now but if we look at real estate in Sao Paulo that's still going to be very, very positive.
Q: Where is the new internal rate of return?A: Every place in the world, all of our returns for the last 25 years have been about, on average 18 percent compounded. And when we look around the world, we're not lowering our thresholds. We still stick to the same discipline. One of the things about Mr. Schwarzman is he's a very disciplined gentleman. And that discipline is reflected in how the investments are analyzed. We're not lowering, nothing is ever lowered. The discipline is adhered to.
Q: With not lowering your thresholds, does Blackstone have to extend its duration of deals?A: One of the reasons people actually like to invest in alternatives, is that
alternatives generally outlast cycles. And many of the big U.S. pension funds and the big sovereign wealth funds choose alternatives, whether it's the big private equity alternative or credit or moreover real estate. Because they will have a five, 10 or over 15-year duration. And they're not going to be subject to a short-term cycle. You have to look at them in a very different way.
Q: What is the future for Europeanbanking?
It's going to be increasingly a bigger A:challenge. If you're talking about jump starting one of those countries into the top five because you've got the continued success of the Chinese banks and I think the realities are that JPMorgan, Bank of America Merrill, Wells and to a lesser extent Citi, are going to continue to go from strength to strength with their global footprints. The Europeans are going to have to become less global and I'm going to use a different word, more international in that they're going to have to choose four or five markets in which to prevail.
This interview has been edited and condensed.
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