Stocks rise on stimulus hopes, China rate cut
Investors await comments from the Fed about the possibility of more quantitative easing. US initial jobless claims fall. China cuts a key interest rate.
Updated at 10:13 a.m. ET
By Andrea Tse
Stocks rose Thursday as the markets hoped for signs of monetary stimulus from Federal Reserve Chairman Ben Bernanke at his congressional testimony and after a fall in weekly initial jobless claims.
The Dow Jones Industrial Average ($INDU) was up by 92 points at 12,506. The S&P 500 ($INX) was up by 7 points at 1,322. The Nasdaq ($COMPX) was rising by 10 points to 2,855.
The major U.S. indexes closed up more than 2% Wednesday as investors flooded into stocks on the hope that the Fed might soon signal its openness to another round of quantitative easing.
Bernanke testifies before the Joint Economic Committee in Congress at 10 a.m. ET. Investors will parse the nuances of his congressional testimony for guidance ahead of the FOMC meeting in two weeks.
Policymakers in recent days have remained divided over the need for more stimulus, and investors want to know whether the Fed will ultimately agree to act on tepid domestic jobs growth, deepening European contagion risks and the looming U.S. fiscal cliff with an Operation Twist II or QE III this month.
Federal Reserve Vice Chair Janet Yellen said Wednesday night that "risk management considerations arising from today's unusual circumstances strengthen the case for additional accommodation," suggesting that the Fed could ramp up its bond purchasing program or hold off on interest rate hikes.
The Labor Department reported Thursday that initial jobless claims for the week ended June 2 fell to 377,000 from the previous week's upwardly revised figure of 389,000. The decline was the first since April. Economists surveyed by Briefing.com had expected the number of Americans filing unemployment claims for the first time to slide to 375,000.
The four-week moving average was 377,750, an increase of 1,750 from the previous week's average of 376,000.
Continuing claims for the week ended May 26 totaled 3.293 million, an increase of 34,000 from the preceding week's level of 3.259 million.
At 3 p.m., the Federal Reserve is expected to report that consumer debt rose by $10 billion after soaring by $21.4 billion in March.
The FTSE in London was up 0.7%, and the DAX in Germany was up 0.6%. The Hang Seng Index in Hong Kong settled up 0.9%, and the Nikkei in Japan rose 1.2%.
The July crude oil contract was down 44 cents at $84.58 a barrel. August gold futures were falling $18.50 to $1,615.70 an ounce.
The benchmark 10-year Treasury was advancing 11/32, lowering the yield to 1.6%. The dollar was trading sideways, according to the dollar index.
In corporate news, Apple (AAPL) has moved to stop Samsung's sale of the Galaxy S III smartphone in the U.S.
Nasdaq (NDAQ) announced Wednesday a $40 million compensation plan for financial organizations that lost out in the botched Facebook (FB) IPO last month.
JM Smucker (SJM), the maker of jellies and jams, reported fourth-quarter net income Thursday of $104.1 million, or 93 cents a share, up from year-earlier earnings of $94.9 million, or 82 cents a share. Adjusted profit rose to $1.10 a share from $1 a share. Net sales for the fourth quarter were $1.36 billion. On average, analysts expected earnings of $1 a share on sales of $1.36 billion. For fiscal year 2013, the company anticipates that net sales will increase 7% and non-GAAP earnings will be between $5 and $5.10 a share. The earnings projection excludes a cost of 50 cents a share for special projects.
Lululemon Athletica (LULU) reported first-quarter earnings of $46.6 million, or 32 cents a share, up from year-earlier earnings of $33.4 million, or 23 cents a share. The athletic wear retailer posted first-quarter revenue of $285.7 million. Analysts, on average, anticipated first-quarter earnings of 30 cents a share on revenue of $270.9 million.
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Investing from savings and borrowing to do so are effectively the same thing. You're drawing down the potential loan bucket either way. Higher saving rates mean that there's a higher return required before you meet the return of cash that sits around doing nothing.In other words, an expected return of 1% makes sense if you're only getting .15%. Not if you're getting 2% risk free.
Again.. Which is better to borrow.. 2% or 5%? Which will make you defer spending? .15% on savings that sits around doing nothing or 2% on savings that sits around doing nothing?
If they're only willing to lend to people when there's a govt guarantee, they obviously weren't qualified. Govt guarantees are just additional security.
Confidence isn't exactly going to be helped by deterring consumption and investment. Think of how much slowing output hurts confidence, now make that a retraction in output. What do you think that'll do to confidence?
But yet you agree we are not seeing the "consumption & investment" now? So I'm really confused by your question. Not to mention I disagree that allowing the interest rate to go back to a more normal level with hurt. Maybe initially, but when allowed to continue, and the market settle (something like 12-18 months) things would improve. And without all the negatives our current policy (after 3+ years and still no positive outcome) is bringing.
And what about businesses using their own savings for expansion? Either as a backstop to loaned money, or just spending it? That's what the MG's of the would are not doing now, and would be if they had more confidence in the economy.
And I disagree with "qualified people are not asking for loans." I have heard and read several stories to the contrary. Unless the loan comes with a government back stop, like an FHA loan, you are seeing the banks pass on even qualified borrowers.
So I'm curious.. which is better? Having saver get a little more in their bank accounts and curb consumption and investment (reducing output and increasing unemployment) or have a policy that allows consumption and investment to go unhampered?
Savers aren't going to get anything without borrowers accepting higher rates first. And that's the crux. Borrowers aren't demanding loans when they're low cost or effectively free, so why on earth would they want to pay for them? When the saver's money is actually being put to use and being allocated, then you'll see banks "buying" more money from savers.
Financials aren't making loans because qualified people aren't demanding them. No one is expanding with their own because there's insufficient demand to do so.
This isn't even theory.. this is basic business. You don't pay for raw materials you can get for free. You don't expand unless there's a need. You don't buy something unless you get a better return than everything else you could be doing. You save more and spend less if you get more money to save.
In order words, everything people and businesses can do to reduce output and increase unemployment they are pushed to do with higher rates.
And (as we covered earlier) the MG's of the world are holding back, and using the willing manipulation of the Market (holding the rates low) as motivation.
Again...... we both agree we need commerce increased. We both know there is money "sitting" that we want to see flowing in the system. What I'm telling you is the financials, which hold the bulk, have good reason why they are holding back, and the next biggest chunk is the MG example. And this is REALITY, not some regurgitated theory. We are seeing this happen....
Keeping it where it is isn't hurting.. it's not helping much, but it's not hurting. It's not pushing people to save instead of spend. It's not pricing people out of debt markets, it's not putting an obstacle to cash investment.
How are lower rates preventing people from buying stuff? I've showed you how higher rates stop them, and to increase output and employment we need people and businesses to buy stuff that needs to be produced.
The examples you gave, of where a raised rate was used for fiscal policy, all saw the rate raised above what was normally accepted as a standard rate. And I'm not saying 3% is the right number, I just used that as an example. But whatever that number should be, we all know it should not be where it is, and keeping it here has hurt, not helped.
Probably - at least temporarily, but we wouldn't be in this predicament in the first place if interest rates were market driven. The policies of the Fed have manipulated rates down 90% over the last 30 years - massive growth and expansion built on cheap money that's only gotten cheaper. Now we are at the bottom, with nowhere to go and no wiggle room...
Those times when they used high rate policies were very effective.. at causing a recession and getting inflation under control. That's what they policy is used for, to cool down an overheated economy.
There is nothing served well from adopting a tighter monetary policy. Consumption and investment will fall if it happens. People will save more when interest rates are higher. A higher risk free rate of return means that expansion needs to produce an even higher risk-adjusted return if they use their own cash. And the cost of expanding via debt increases as a result of higher debt service costs, making it harder for an expansion to yield a net positive cash flow
Do you think the spread would change drastically? Borrowing rates and saving rates are low. Borrowing rates would need to increase first in order to be able to compensate savers if savings accounts had a higher rate of return. And there would need to be sufficient borrowers borrowing at those higher rates to compensate savers, which there won't be because they aren't taking it when money is basically free.
When the lending system is actually using all the funds out there, deposits need to be allocated in order to meet loan demands. That means loans go to the highest bidder. If the price of the loans if good enough, banks increase the rate for savings account to get more raw materials to make loans. That's when you'll see savings rates improve.
Look, I'd love to have a higher rate on my savings accounts. I'm locked in on what little outstanding debt I have so I'm not looking for low rates for some personal benefit. It's just not going to happen, and from a economic point of view a constricting monetary policy would be suicide.
By the way, they tightened money in 1936 too."
All examples why these policies are futile and not needed. Even counter productive, as you have agreed with. What we are saying is to STOP DOING THEM.
And yet low rates are not working?
It really is amazing you keep looking past this, choosing "book speak over what your own eyes are telling you.
That's even more of a reason to buy stuff or expand using cash/low rates because the real rate is even lower. Borrow at 4%, if you expect policies will lead to 5% inflation you get a negative real interest rate and repay the loan using nothing but the inflated value on the loan. You retain the complete purchasing power. Check out the article "It's Time for the Fed to Go Negative" It's an article by Romney's adviser.
There is nothing, not one possible thing that pushes consumption or investment as a result of increased interest rates. Even just the logical arguments you offer break down and end up being more evidence for low rates.
There's a reason that raising rates and tightening money are called constricting policies.
Look at some of the instances when they've been used. Late 90s to try to cool off the overheated economy. Mid 2000s to try to stave off the housing bubble (discount rate got to about 6%) Late 90s to counter somewhat milder inflation, 79-80 to counter inflation, even going back to 1922 to counter post WW1 inflation. In all of these instances, except mid 2005s, a recession was caused by tighter money and expansion was restored when money was looser again.
By the way, they tightened money in 1936 too.
Psychologically, our current low rates on savings are killing us. If you have $10k in a savings account and you see a tangible return of $25-$30 per month, you can see your savings grow. At the end of the year, you've got $350 more dollars than you had at the beginning of the year - a real, tangible and meaningful return, obtained without risk. This does wonders for the psyche, it makes you more optimistic, more secure and probably more likely to invest and borrow and take risks.
Let's try an analogy. Let's go with the "burning house" analogy.
What this administration is doing is spraying the burning house with kerosene expecting the flames to die down. People who see the damage this is causing are running for the hills and not coming back till things are normal again. Going back to using water to put out the fire would be going back to normal, not going extreme like trying mineral spirits or gasoline. What we need is to get back to normal, not to "raise" anything. By accepting our current plan, you are seeing a return to normal as a raise. That's the mistake you are making, IMO.
And you know as well as I do that the "mover & shakers" of the world are not happy finding a better return on a CD, they want to go out and make things happen. But, for those that would save more.... that too will pay off in the long run. Just that today most of those hold back are doing so to cover their azz when, not if, they get called.
Would you expand using debt at 3% interest or at 8%? interest
Would you be more likely to spend you own money if you were getting .25% or 3% on savings? If you expansion would net you 1%, a small expected return by all accounts, would you do it if you could sit on cash risk free and make 3%?
Expansionary policy won't make things much better, but constricting will make things much worse.
Nothing about raising rates pushed people to expand, either in investments or consumption. Low rates pushes both.
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