China Devalues Currency

China shocked the markets this week when they announced they will devalue the Yuan, which had previously been pegged to a basket of currencies. This caused the currency to decline in value (vs. the US Dollar) by over 4% in just a few days. As no one was expecting this, the markets reacted unfavorably and stocks fell on the news. U.S. stocks that do a large amount of business in China were hit especially hard, as a devaluing Yuan makes U.S. goods appear more expensive. However, the market recovered once it was realized that the devaluation was merely to manage the pace of trade rather than outright devaluation. Put another way, the Chinese government is still keeping a peg on the currency, but it simply provided a little slack so that the Yuan can move a little bit based on market conditions.

Eurozone GDP Growth Slows:

This morning, eurozone GDP numbers were released and showed growth of 0.3%, down from 0.4% last quarter. This was short of the average economist expectation of 0.4% growth. Spain posted 1% GDP growth and was the highest among the eurozone countries. Germany posted higher GDP growth, though their 0.4% rate fell short of the 0.5% expectation. France showed no growth after posting strong first quarter growth. Italy and the Netherlands eked out growth, barely moving the needle. While these growth rates were pretty much in line with expectations, Greece said yesterday that its economy grew by 0.8%, well ahead of the 0.6% drop economists were expecting. The Greek economy benefited from strong tourism and higher than expected retail sales.

Overall, the GDP numbers show slow growth, meaning the eurozone probably is not as far into the recovery as everyone had hoped it would be by this point. The unemployment rate remains high at 11.1%. This is not too different than the U.S. GDP growth at the beginning of our latest recovery. Though growth appears to be slowing, we would anticipate growth to pick up next quarter and into 2016. The stimulus program from the European Central Bank will likely remain in place until next fall, as was originally planned, and the weakening euro should continue to increase exports, one component of GDP.

Gas Prices Rise as Oil Prices Fall:

The West Texas Intermediate (WTI) Crude Oil futures have fallen nearly 30% since June and are now down more than 21% on the year as supply continues to increase, even despite the grim near-term outlook on oil. Saudi Arabia announced they will expand their production, perhaps in an effort to keep prices lower and put pressure on producers with higher costs. However, the falling price of oil has not been reflected at the pump in many cities around the U.S. This is mainly due to a series of oil refinery outages and pipeline shutdowns. BP had issues that caused them to shut down a refinery that sends oil to Chicago (which then sends oil elsewhere). Also, a few pipelines that ship oil from Canada started leaking, thus shutting those down as well. All told, Chicago and parts of California are experiencing gas prices that reflect a $110 per barrel crude price. The rest of the U.S. is not quite that bad, but a $43 per barrel price of oil should generally see gas prices below $2.00…much lower than the $2.75 we are seeing here in Saint Louis.

Cost of Living Adjustments for Social Security Benefits:

With nearly no inflation reported on the Consumer Price Index for Urban Wage Earners and Clerical Workers to date this year, the Social Security Administration is not expected to provide cost of living adjustments (COLA) for benefits in 2016. Due to this, some may see their monthly net benefits decrease as Medicare premium costs are expected to rise by an estimated 52% in 2016. Majority of those receiving benefits will not be impacted by the Medicare premium increase due to the hold harmless provision that protects most individuals. This provision keeps Social Security benefits already received from being reduced due to rising premiums on Medicare Part B.

But approx. 30% of Social Security beneficiaries, many of whom are higher income beneficiaries, as well as those starting on Medicare in 2016, could see an impact. Others expected to be impacted by Medicare premium hikes are those who are on Medicare but do not collect Social Security. While it often benefits many to delay receiving their Social Security benefits until a later age, this benefit is partially offset under this scenario of rising Medicare premiums when there is no COLA. In years when there is a COLA, the rise in premiums can be spread out for everyone. For those who would not be protected by the hold harmless provision, Medicare premiums for some could go from $104.90/month in 2015 to $159.30/month in 2016.

No COLA to Social Security benefits means there would be no increase to the Social Security taxable wage base (currently at $118,500).

While the Social Security and Medicare Trustees report for 2015 indicated no change expected in monthly benefits for 2016, the official announcement is due to be released in October. The last time there were no COLAs was in both 2010 and 2011. The years after had COLAs of the following: 2012 (3.6%), 2013 (1.7%), 2014 (1.5%), and 2015 (1.7%). While it is expected that there will be no COLA in 2016, it is projected that 2017 will see a COLA of 3.1%.


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