The IMF (International Monetary Fund) predicted the U.S economy would grow only 2,5% in 2015, and that`s down from their previous prediction at 3,1%. IMF urged the Fed (The Federal Reserve) to wait until first half of next year to start raising short-term interest rates.
The U.S central bank has kept its key benchmark rate at a record low near zero since December 2008, and the IMF said the Fed should wait for more signs of improvement. What they will look for is «greater signs of wage or price inflation».
IMF Managing Director Christine Lagarde said «The economy would be better off with a rate hike in early 2016», and Fed Chair Janet L. Yellen said she expects to begin raising rates by the end of the year, while some economist speculate that the Fed will start raising rates in September. They both know much better than me that deflation is more dangerous than inflation, and deflation is what they are fighting against and not inflation.
Many are bullish on bank stocks.
The KBW Bank Index is up 0,86% right now. Trading at 77,96 which is up 0,66 points. That`s much better than the bottom at 18,62 on March 6, 2009, but down since the top at 118,06 on May 18, 2007.
Technically speaking, the index is breaking the resistance, and the bank stocks are increasing, while the precious metal is declining. Gold is still in a bearish territory and the price is still below $1,200 an ounce.
What`s going on? Higher rates is good for the banks because they can charge more for loans and earn more because of bigger profits on the spreads between loan rates and deposits. Buoyant outlook for the U.S economy in the second half of 2015, and the expected interest rate hikes blows up the banking index.
In the predictions for 2015 I talked about the interest rate to start to increase in 15 – 18 months, and that should be next year. I also talked about how it will start, and it is predicted to see that the rates will go up slowly.
Banks will benefit from a stronger economy and higher interest rates. The legendary investor Warren Buffett seems to see something in the banks earnings, which reflects more than their current stock valuations.
Warren Buffet and his company Berkshire Hathaway (BRK-A) has added much more to its holdings of Wells Fargo (WFC) and U.S Bancorp (USB), and the banks seems to have taken its reputation back since the financial scandals a few years ago.
Citibank is upgraded to buy by Goldman and the New York-based firm is showing progress in increasing earnings and returning capital to shareholders. Citibank is the only firm in the KBW index that is trading below tangible book value, but that will probably end soon.
Investors are keeping a close eye on bank stocks, especially money center banks, since the Fed has indicated a rise in the interest rate. Their key focus is Bank of America, because they will earn on the rise in interest rates.
If the rates increase 1% it is estimated that Bank of America will increase their earning by a whopping 20%.
Rising dollar means a strong economy, and stronger dollar and rising interest rates is bearish for gold, but the precious metal can go up in a rising interest rate environment, but only if an inflation problem is implied by the rise in yields.
To measure that, you can look at the spread between inflation protected U.S Treasury bonds (TIPS) and unprotected long-term bonds (TLT). The rise in yields (drop in T bonds) is due to rising concerns about inflation.
280,000 new jobs was added and that was better than expected (estimate of 226,000) in May, which created a steeper yield curve. Long-term interest rates increased more than short-term interest rates.
Rising bank stocks are signaling economic recovery.
Bank stocks are increasing because they earn money. If not, a flattering yield curve would squeeze bank net interest margins and profits, and investors would run from the banks.
IMF and the Fed said that they don`t know when to rise the interest rate. They will wait for the coming data and so should you.
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