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Matt's Market Insights

October, 2016 Archives

A Treat for Savers?

By Matthew Kerkhoff

 

Low interest rates have been the bane of savers, retirees, pensioners and many others for a number of years now. With interest rates on the verge of rising, these folks are starting to breathe a sigh of relief.

 

But rising interest rates are a double edged sword, and are unlikely to provide as much benefit as many people expect. To understand why, we need to look at why interest rates are rising, and also understand their potentially negative side effects.

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Corporate Profits Making the Turn?

By Matthew Kerkhoff

 

Over the past five quarters, corporate profits have been shrinking, but the stock market remains near all-time highs. This divergence can’t persist forever, and will eventually break one way or the other. The question is, which way will things go?

 

At the moment, it appears that earnings could be reversing course, which would provide a very helpful tailwind for equity prices.

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Rate Hike Considerations

By Matthew Kerkhoff

 

Looking at Fed Fund futures prices, it’s evident that the market is pricing in a rate hike for December. You can see this in the chart below, which shows nearly 70% of market participants expecting the Fed Funds rate to be 25 – 50 basis points higher following that meeting.

 

But a rate hike is not necessarily a done deal, as a number of factors are working against the Fed’s dual mandate of 2% inflation and maximum employment.

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Dynamics in a Rising Rate Environment

By Matthew Kerkhoff

 

Over the last decade, “Don’t fight the Fed” has become an increasingly important mantra, and a very profitable one. After raising rates 17 times between 2004 - 2006, the Fed entered easing mode and has remained there ever since.

 

That is, until last December, when the we saw the first rate hike in over a decade. This marked a very important inflection point in financial markets that investors are only now starting to react to.

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Down the Monetary Policy Rabbit Hole

By Matthew Kerkhoff

 

In the world of uncharted monetary policy, Japan has become the leader in exotic policies. They’re further along the easing curve than anyone else, and represent a live case study on the limits of central bank intervention.

 

The BOJ recently made some major changes to how they will institute expansionary monetary policy going forward. It’s worth exploring these changes so that we can better understand their ramifications if and when the time comes for the U.S. to consider following suit.

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