"Interesting" and then some

The word “interesting” is a complex word.  It’s not a word you want to hear, for example, when a doctor is reviewing your lab work, and we certainly wouldn’t recommend using it when your loved one asks you how the food they cooked for you tastes. But “interesting” can be a word you want to hear when it comes to opportunity, especially when it is used to describe an investment or set of potential outcomes.  If someone says to you, ”You won’t believe what that building just sold for.”  You might respond with, “Interesting…keep talking.”

Recently, this is what “interesting” sounds like: China cuts reserves requirements, Britain considers leaving the EU, US employment data is better than expected, the Minnesota Fed President wants to break up the big banks, energy collapses, energy stabilizes, recession, not a recession, it’s a leap year.  Needless to say February was a very interesting month. So here in no particular order or degree, is a little color around some of the interesting events for the month of February. 

Starting with markets, the S&P 500 Index lost an additional 5% in the early part of the month, continuing January’s slide.  The “R” word (for recession) was being thrown around quite a bit early in the month as energy prices continued to collapse, putting pressure on global equity markets.  Interestingly, February ended with two straight weeks of positive equity performance, as energy seemed to stabilize. 

On the economic front, wages and employment continued to show signs of strength in the US.  Retail sales and industrial data also came in with better results.  Is the current US economic data strong enough to override the concerns the Fed has about the global economy?  Will they raise rates?  At the moment, market makers give a 12% chance that the Fed will raise interest rates in March.  This would most likely mean that the next possible rate increase would come in June. 

June also happens to be the month when Great Britain will hold its referendum on European Union membership.  With several months to go, the outcome is still unclear, but the economic impact of a British exit, or “Brexit,” on Britain, the EU, and its global trading partners could be significant.  This could be an interesting predicament for the Fed and particularly for Europe’s central bank.

While it seems that global concerns may keep the Fed reluctant to make a move anytime soon, China once again cut its reserve requirement for banks by an additional 0.5%.  This came on the heels of China’s 7th month of a PMI report below 50, which is an indication of a contracting economy.  With this rate cut, many analysts believe that as much as $100 billion of liquidity could be pushed into the Chinese economy.  We will see if any of these measures can do anything to ease the slide in the Chinese stock market, currently down by over 18% year to date.

Lastly, how’s this for interesting?  Neel Kashkari, the newly appointed president of the Minnesota Federal Reserve, wants to break up the “To Big to Fail” banks.  In a February 16th speech given to the Brookings Institute, Kashkari proposed breaking up the mega banks as one of the options for protecting the financial system from another meltdown.  He intends to conduct several policy symposiums in an effort to create a broadly supported plan that allows for the “rapid and orderly resolution” of one or more of the financial institutions in the event of “material financial distress.” Kashkari is viewed as a specialist on the topic, as he was one of the leading officials at the Treasury during 2008, involved in both crafting and administering the bank bailout program known as TARP.  This should provide an interesting backdrop for financial institutions for the remainder of the year, especially as the symposiums get underway.

What is interesting to some may not be interesting to others, but February certainly did its best to cater to all.  A negative beginning was countered with a positive ending, as the market’s concerns were overcome by a spate of positive US economic data. For us, February suggests that the word “interesting” be viewed less in the context of a negative lab result and more in the context of a potential for opportunity.