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Fiscalpolicy

Rethinking Fed Intervention: Wages, Inflation, and AIIn light of the precarious global economy and numerous contributing factors, such as deglobalization, the inflationary impact of the war in Ukraine, an aging population, and an overwhelming amount of debt, the Federal Reserve's role and efficacy in the current economic climate have come into question. Drawing on Jeff Snider's work, it is increasingly evident that the Federal Reserve has not completely controlled the financial system. Despite their efforts to manipulate interest rates, external factors and market forces continuously challenge the Fed's authority. The market's current outlook suggests that the Fed may be forced to cut rates soon, indicating that its strategy of hiking rates may not have been the best approach. The central premise that the Fed should intervene to suppress inflation by keeping wages low is fundamentally flawed. Higher wages can lead to increased productivity investments, reducing the need for labor and raising living standards over time. However, hiking interest rates can stifle investment, hindering economic growth and exacerbating inequality. In recent months, inflation has decreased independently, without the direct influence of the Fed's actions, suggesting that the economy may be self-correcting. However, this natural deflationary pressure could be disrupted by external factors, such as the tightening of lending standards brought on by the mini-banking crisis. The ongoing threat of AI-driven job losses and an impending recession further complicates the situation for American workers. Jeff Snider's research at Eurodollar University offers valuable insights into the complex relationship between the Fed and inflation. Snider argues that the Fed's actions may not be the primary cause of inflation, as it has limited control over the money supply. Instead, he posits that the global financial system, specifically the eurodollar market, plays a more significant role in influencing inflation rates. As we progress into the exponential age, the rapid advancement of technology and artificial intelligence (AI) will lead to significant disruptions. However, there are potentially positive aspects to these developments. AI could revolutionize industries, streamline processes, and create new opportunities. The widespread adoption of AI can lead to increased efficiency, improved decision-making, and the automation of repetitive tasks, ultimately driving economic growth. The productivity gains associated with AI could offset some of the negative impacts of the current economic climate, such as job losses and wage stagnation. In summary, the belief that the Fed should intervene to suppress wages to tackle inflation is fundamentally misguided. Such intervention can have numerous negative consequences, including hindering investment and stifling economic growth. In contrast, allowing wages to rise can lead to increased productivity investments and improved living standards. To effectively address inflation, it is essential to consider a more comprehensive range of factors beyond the Fed's actions and recognize the importance of encouraging sustainable economic growth through policies promoting higher wages and productivity investments. Policymakers and financial analysts must carefully consider the consequences of their actions and their impact on the broader economy and society. Thanks to Michael Green, aka @profplum99, for inspiring me to write this analysis :) twitter.com
TVC:US10Y
by BitcoinMacro
Endgame for central banks far from doneThis week the UK economy posted its highest inflation reading in 41 years rising 11.1% year on year (yoy) in October. The recent jump is largely the result of the uprating of the household energy price cap in October. Core inflation moved sideways at 6.5% yoy. We expect this to represent the peak for UK inflation. As the base effects of high energy prices begin to factor in, headline inflation in the UK is likely to fall. At the same time, the ongoing recession is likely to strip away the underlying price pressures. This has been evident in lacklustre consumer demand alongside waning housing market activity. UK Government claws back its credibility with the Autumn Statement Meanwhile the UK Government’s fiscal statement released this week1, confirmed significant fiscal austerity with spending cuts and widening of the tax base amounting to around 2% of Gross Domestic Product (GDP) after five years, although its mainly backloaded. The energy price guarantee will now have its cap for average household dual tariff annual bill lifted from £2500 to £3000 from April 2023 and remain in place for a further 12 moths. This is less generous than the original plan to cap bills at £2500 for two years. The Office for Budget Responsibility’s (OBR) analysis suggests that the measures announced in the Autumn statement reduce the depth and length of the recession this year and next but leave the economy on a similar growth trajectory over the medium term. We expect real GDP to contract by 1.3% next year followed by growth of 2% in 2024. With this is mind, we expect the Bank of England (BOE) to pause its tightening cycle once rates get to 3.5% in December followed by 50Bps of cuts in H2 2023. Eurozone to endure a short recession Owing to the external supply shock, Eurozone has faced a similar inflation narrative as the UK. In October Eurozone inflation reached 10.6% yoy. We expect inflation to remain high in the next few months, however starting early next year, the annual rates should decline aided by the base effects from the surge in energy prices in 2022. Owing to which we expect European Central Bank to continue to tighten monetary policy until Q1 2023. On the positive side, while Eurozone will endure a recession in Q4 2022 and Q1 2023, we expect the recession to be less deep than previously expected owing to the less dire gas situation. This was evident in the November ZEW survey, which showed expectations gauge for the economy in the six months ahead improve significantly to -38.7 in November from -59.2 in October. This remains in line with our view that in six months’ time the Eurozone economy should be on its way out of a recession. Federal Reserve (Fed) speakers singing from the same hymn book Fed officials backed expectations they will moderate interest-rate increases to 50 basis points next month, while stressing the need to keep hiking into 2023. St. Louis Fed President James Bullard said policy makers should increase interest rates to at least 5% to 5.25% to curb inflation. He also warned of further financial stress ahead. Bullard’s comments came a day after San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” Fed Governor Waller (one of the more hawkish Fed officials) emphasized that while rate hikes will likely slow to 50bp in December, the ultimate destination or “cruising altitude” will depend on labour market and inflation data. Waller echoed Atlanta Fed President Bostic’s concerns about labour costs pushing up service sector prices which in our view remains the key upside risk to inflation even as core goods prices have slowed. Fears are mounting that relentless rates increases will hit economic growth, with a critical segment of the Treasury yield curve at the most steeply inverted in four decades, historically such an inversion has tied in with a US recession. Maintaining a value bias within equities Amidst the challenging backdrop for global equities, we have observed the value factor outperforming the growth factor by 17.3%2 in 2022. Across global markets, European equities are trading at the deepest discount (32%) from price to earnings (p/e) ratio to their 15-year average owing to fears of the energy crisis being detrimental to the economy. The recent 3Q 2022 earnings season provided evidence that European earnings have remained stubbornly resilient despite the broader macro turmoil. A deeper dive into the sector level suggest that energy, transport, utilities and healthcare have seen some of the biggest increases to their Earnings Per Share (EPS) estimates in 2022. The WisdomTree Europe Equity Income Index outperformed the MSCI Europe Index in 2022. The performance attribution highlighted below illustrates that the higher exposure to value sectors such as materials, financials, healthcare, industrials, and energy contributed to the outperformance.
FRED:T5YIE
by aneekaguptaWTE
1
Yield Curve Control Goblin Capital presents you -- The most risky contrarian trade you can currently take -- Am I all in? Yes Do I have children? No Am I still young and not much to lose? Yes Do I have a lot of bad debt? No Will I financially recover if this trade goes South? Yes Therefore, my dear Goblins: I urge you to only play with money that you are willing to lose. Please do not bet the house and the kids on this trade. This will be the outcome you are betting on: BOE — Recently reverted to Quantitative Easing (QE) in order to save its financial system, which will soon morph into YCC — more on this later. BOJ — Continuing their policy of YCC in order to save their banking system and allow the government to borrow at affordable rates. ECB — Continuing to print money to purchase the bonds of weak members of the EU, but has pledged to begin Quantitative Tightening (QT) soon — more on this later, too. PBOC — Restarting the money printer in order to provide liquidity to the banking system to prop up the falling residential property market. Fed — Continuing to raise interest rates and is shrinking its balance sheet via QT. Source: A. Hayes, Medium article "Contagion" See you in Dubai next summer. Regards, Hugo Chief Executive Goblin Goblin Capital
BITSTAMP:BTCUSDLong
by Goblin777k
2
SMH - TECH Welfare @ $282 Billion / $25B Tax Credit PerNancy and the Gang anxiously await the Senates Taxpayer handout to the Industry. Po Nancy, $107 Million simply is not enough for her and Pablo the Shark Tank Drunk. Nancy had to gobble $341K in losses on NVDA after exiting her 25K Shares in a loss due to slime lights a shinning. Bravo, add 3 zeros and it's all good. Everyone should lose a hand. Preferably, a head. __________________________________________________________________________ They'll need to expedite this Grift Gift as China's warned off the Carrier Group as well as Fancy - show up and it's going to be "A Dangerous Moment"... Nancy risks our young men and women in the Navy with harm's way... Don't give it a second thought. Saddle up and please take the rest of the House and Senate with you. Create a Threat to National Security... Risk Lives, Profit from it as a matter of course. Shut up Hoi Polloi, we didn't ask you, we decide - you obey. ___________________________________________________________________________ The insiders in and outside the Beltway can't wait to get this Theft to the House and wrap it up for August recess. Qui Bono, you ask? Intel, TSMC, and Texas Instruments - direct Jing. Fabless chipmakers like Nvidia and AMD will not be left out in the cold. They will receive "Scientific Grants out of the $230 Billion in free money for "Innovation." It is quite likely the following Companies will join the Grift eventually: Micron Technology Inc. (MU) Amkor Technology Inc. (AMKR) Camtek Ltd. (CAMT) Analog Devices Inc. (ADI) Although these ladies doth protest too much, it's an irresistible deal... free money. We'll see $175B in Tax Credits gifted when everyone joins the Semi-Orgy. You and me - we get the Bill @ $457 Billion. Enjoy or do something. ps. - IMF: Russian economy doing better than expected
NASDAQ:SMH
by HK_L61
8
SPX: Market MoversGood morning everyone, Below is a list of some of the events that have most influenced the movements of the American stock index from the beginning of the Pandemic to today. The same events can also be used to accompany the movements of other indices to study their effects. Apart from some unforeseen events, everything revolves around and is supported by what is decided by US policy in Congress and by the Federal Reserve. The factors that worry the markets most are the uncertainties about the fiscal and monetary policies of the main western economy. 1) March 6: US Congress approve $8.3 billion Emergency Coronavirus Spending Package ; 2) March 15: FED announce approximately $700 billion in new quantitative easing (QE); 3) March 18: US Congress approve $192 billion Coronavirus Emergency Aid Package ; 4) March 23: FED announce “unlimited” quantitative easing (QE); 5) March 25: US Congress approve $2.2 trillion CARES Act ; 5a) April 8: Biden became the presumptive nominee after Sanders, the only other candidate remaining, withdrew from the race; 6) April 28-29: FOMC Meeting; 6a) May 8: The national unemployment level reaches 14.7%, with more than 33 million jobless claims having been filed since mid-March; 7) May 25: George Floyd protests; 7a) June 5: Biden surpasses the required 1,991 delegates to win the Democratic nomination; 8) June 9-10: FOMC Meeting; 9) July 28-29: FOMC Meeting; 9a) August 11: Biden announced that former presidential candidate Senator Kamala Harris would be his running mate; 9b) August 17-20: Democratic National Convention; 10) August 27: FOMC Statement on Longer-Run Goals and Monetary Policy Strategy; 11) August 31: Softbank; 12) September 14-15: FOMC Meeting; 13) November 3: US Presidential Election; BUILD BACK BETTER AGENDA; 14) November 4-5: FOMC Meeting; 14a) November 9-16: End Phase III vaccines Pfizer, Moderna and AstraZeneca; 15) December 15-16: FOMC Meeting; 16) December 21: US Congress approve $900 billion in relief (Consolidated Appropriations Act); 16a) January 6-7: United States Capitol attack; 17) January 14: first proposed $1.9 trillion American Rescue Plan Act of 2021; 18) January 26-27: FOMC Meeting; GameStop short squeeze begun; 19) February 2: Democrats in the United States Senate started to open debates on a budget resolution that would allow them to pass the stimulus package without support from Republicans through the process of reconciliation; 19a) February 9: Second impeachment trial of Donald Trump begins; 19b) February 13: Trump is acquitted; 20) March 4: The Senate takes up debate on the American Rescue Plan Act of 2021; 20a) March 11: US Congress approve $1.9 trillion American Rescue Plan Act of 2021; 21) March 16-17: FOMC Meeting; 22) April 27-28: FOMC Meeting; 23) May 7: Colonial Pipeline ransomware attack; 24) May 10: Israel-Palestine Conflict Intensify; 25) June 8: US Congress pass The United States Innovation and Competition Act of 2021 (USICA), $110 billion; 26) June 11-13: G7 Summit; 27) June 15-16: FOMC Meeting; 28) July 14: retreat from Afghanistan; 29) July 27-28: FOMC Meeting; 30) August 10: Senate passes $1.2 trillion Bipartisan Infrastructure Bill; 31) August 31: Evergrande; 32) September 21-22: FOMC Meeting; 33) October 30-31: G20 Summit; 34) October 6: Congress Passes Bill To Raise Debt Limit By $480 Billion; Hope the above is of interest but if you have any queries please do not hesitate to ask. Good luck everybody! Cozzamara Disclaimer: Please note that I am not a professional trader and these are my personal ideas only. The information contained in this presentation is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. Cozzamara is not responsible for any liabilities arising from the result of your market involvement or individual trade activities.
OANDA:SPX500USD
by cozzamara
BULLISH reversal in play for the US Dollar! Following the 2008 Financial Crisis, the Federal Reserve had to apply loose monetary policy measures in order to stabilize and stimulate the economy. The Fed started lowering the Federal Funds Rate back in late 2007, as a response to the rising unemployment at the time. This is the most traditional monetary policy measure, which aims to stimulate both businesses and individuals to borrow and spend more, which in turn would lead to an increase in economic activity. When rates are low borrowing money to start a business, buy a house or a car looks much more appealing and attractive. When the economy is in a recession such monetary policy actions are helpful and needed, but if interest rates stay very low for way too long after the economy stabilizes, then the higher spending levels caused by the cheap available credit would simply lead to higher inflation. Inflation has been one of the most heavily discussed subjects so far in 2021 and rightfully so. You see, a substantial increase in inflation is a net negative for all of the major markets out there – Bonds, Stocks, USD Bonds Inflation is a bond’s worst enemy as basically a bond is a contractual agreement between a borrower (Seller of the bond) and a lender guaranteeing that the Lender (Buyer of the bond) would be receiving the bond’s Face Value at maturity plus all of the regular and fixed interest payments (coupons) up until that point. Well, considering that both the Face Value and Coupon are fixed US Dollar amounts, a higher inflation would basically erode the real returns of that bond. To put it in simple words if the yield on a 10-year Treasury bill is 2%, that means that the investor is guaranteed to get a 2% annual return on that bond investment. However, if annual inflation is at 5%, then that makes the bond investment much less appealing as an investor would be technically losing 3% per year in such environment. This is the main reason why bond yields constantly adjust to both Inflation and Interest Rate expectations. When Inflation goes up, Interest Rate expectations start shifting towards expecting a rate hike, which leads to lower bond prices and higher bond yields. This dynamic exists and occurs as in an inflationary environment bonds become less attractive and in order for demand to come back to the bond market investors need to see an adjustment in the bond yields (an increase), which will protect them against inflation and would make it worthwhile for investors to lend their money to the US government by buying these bonds instead of putting it in a savings account with the bank. The bond yields rise either when we see a rate hike or when investors expectations of a rate hike increase. This mechanic ends up protecting bond investors in a higher-interest and inflation driven environment and makes bonds more stable and attractive investment vehicles than stocks. Stocks With stocks it is much more straightforward. Stocks trade largely on current as well as discounted future corporate profits, and higher rates tend to cut into profits because they increase the cost of money. Additionally, when rates are higher that means that discounting future cash flows to the present occurs with a higher denominator, which leads to lower profitability. If the underlying reason for higher rates is inflation, rising prices and wages also increase a company's costs, which further erodes profits. As you can see higher inflation and higher rates lead to plenty of problems for stocks. USD Last but not least, inflation is also bad for the US Dollar as it erodes the purchasing power of every dollar in circulation. To put it in simple words, if you have $100,000 in your savings account earning 1% interest annually, but the inflation in the country sits at 3% you would technically lose 2% from the purchasing power of your capital, or in other words $2,000, in just 1 year. Now, after seeing why and how higher rates and higher inflation affect Bonds, Stocks and the US Dollar, you probably understand why all journalists, economists, investors, hedge fund managers, politicians, central bankers etc. are constantly discussing these topics. Inflation and Interest rates expectations are not static but rather very dynamic and are constantly modified and affected by economic reports, central bank commentary, monetary and fiscal stimulus etc. The predominant view in the market at the moment is comprised of the following elements: 1.”The US economy is on fire” – companies continue to deliver better than expected earnings, consumers are sitting on record levels of savings, people are eager to get back to their normal lives eating out, traveling, shopping. 2. “We will see 8-10% GDP growth in the 2nd half of the year” 3. “Inflation will continue to rise as a result of the low interest rate environment and the huge spending driven mostly by the heavy Fiscal Stimulus by the US Government. 4. “The Fed need to raise rates sooner in order to prevent a hyperinflation scenario” 5. “The Fed will most likely end up being behind the curve once they start tapering, which will force them to rise interest rates quicker” Now, while all of the above-listed arguments make sense to a certain extent, we believe that some of the most recent movements in the US Dollar Index (DXY) as well as the price action in the bond market, which sent bond yields lower despite the hawkish Fed in mid-June are giving us very valuable indications that there is more to that equation. We believe that the whole narrative that is circulating at the moment starts from the wrong place. Considering the fact that the US Dollar is the global reserve currency and that it has a direct impact on both US and Global inflation levels and GDP growth, every US economic analysis should start from analyzing the US Dollar performance and its possible future trends. It is true that inflation expectations affect the value of the dollar and that some people might argue that this is a “what’s first the chicken or the egg” argument, but the US Dollar is so much more than the inflation expectations that people throw at it left and right. The USD is the most influential currency in the world and depending on whether it gets stronger or weaker we see whole countries, regions and even continents either struggling or prospering. The US Dollar index (DXY) has been in a clear downtrend throughout the last 15 months, as a result of the unprecedented printing of money that we have witnessed by the Fed in response to the COVID-19 pandemic shock to the economy. The monetary M2 supply in the US increased from $15.5 trillion in February, 2020 to $18.84 trillion in October, 2020 and to $20.1 trillion in April, 2021. This represents a 21.29% increase in 2020 and a 29.7% increase year over year. Technically, such a massive printing of liquidity debases and devalues the underlying currency. As a result of that and the increased inflation speculations and worries among investors we have seen the US Dollar index dropping from $103 down to the $90 level. A lot of negativity has already been priced in the US Dollar as the logic shows that inflation will definitely be picking up, which makes it unattractive to hold significant cash reserves. Thus, everybody has been selling the USD for over a year now. However, what happened in the beginning of the year (January) was that the DXY reached the $90 strong multi-year support and found a lot of buying interest there. After a strong rebound up towards the $94 level back in April, the index came back and re-tested the $90 level and once again found a lot of buying interest, which pushed the price back up to the $92 mark in a matter of few trading sessions. This has created a clear double-bottom pattern with rising relative strength and a clear bullish interest at these levels. We believe that this is something that not many people are paying attention to as they are riding on the bandwagon that the “Dollar is going lower”. However the $90 support has been a crucial level for the DXY going all the way back to 1990s. Back in 2018 that was the exact level where the DXY stopped declining and reversed the 1.5 year long bear market that the USD was trading within since the start of 2017. The reason why we believe that the way the USD moves is so crucial at the moment comes from the fact that the main argument right now for a tighter monetary policy is associated with the “double-digit” GDP growth that everybody expects in the 2nd half of the year and the inflation that this is expected to create in the economy. Well, it seems that most people have forgotten that currency appreciation usually reduces inflation because imports become cheaper and the lower prices lead to lower inflation. It also makes imports more attractive, causing the demand for local products to fall. Local companies usually have to cut costs and increase productivity so they can remain competitive. Furthermore, that means that with the higher price, the number of U.S. goods being exported will likely drop. This eventually leads to a reduction in gross domestic product (GDP), which is definitely not a benefit. That translates to a benefit of lower prices, leading to lower overall inflation. The bond market also signaled that it does not expect the Fed to start tightening any time soon as there was a clear discrepancy between the hawkish Fed and the movement in the 10Y Treasury yields. You see, usually when an Interest Rate hike takes place or when Interest Rate expectations shift towards an increase in the Federal Funds rate, that is considered as bullish for bond yields. The reason for that as we pointed out earlier is associated with the fact that a rising interest rate environment and a potential for higher inflation makes bonds less attractive at the current extremely low yields. Bond yields then go up in order to bring back investors to the Bond market. Well, that has not happened this time around as even though we had a surprisingly hawkish Fed in mid-June, the 10Y Treasury yield has continued to fall. It seems that the 40-year long bull market for bonds has further to go. The Bond market always gives indications as to what is actually happening in the economy but very few people know how to read the correlations and information properly. The most recent price action in the 10Y Treasury yield shows that the real probability of the Fed tightening sooner than expected is much lower than what the equity markets and all other market participants are currently pricing in. Bond investors tend to have more macro-oriented view, which allows them to see the big picture better. So what does that mean? Well, with the US Dollar threatening to reverse its 1-2 year downtrend and break above the critical resistance sitting at 92-93 and Bond yields falling, the economy and inflation growth will be tamed organically by the higher dollar. We believe that this would lead to the Federal Reserve also pushing back its tightening program, which in turn will reignite risk-appetite in the market. Thus, we expect to see Growth outperforming Value in the coming months.
TVC:DXYLong
by DowExperts
Dow Jones Broadening Wedge Test(Lower)The Dow Jones saw another massive decline today, down -13% and nearly $3,000 in a single session making this the new record one-day point decline in history for the Dow and smashing the previous record of -$2,000 which was made last week. High volatility has been expected over the past two weeks and we are getting it in extraordinary fashion as traders appear to be experiencing emotionally-driven panic selling on top of the unknown in company and economic fundamentals which is causing selling as well. It is yet to be known how long this coronavirus is going to be affecting the economy as more states and businesses are forced into lockdown. Without knowing what impact this will have on revenue and earnings going forward, it makes sense to sell from a fundamental point of view, but the speed and rate of decline appear to be mostly emotional selling. In the panic selloff seen today there may be a glimmer of hope from a technical perspective. Traders have now sold price down nearly -32% from the all-time high and are now testing the lower line of the broadening wedge pattern. We have yet to see a significant bounce during the decline other than the last minute bid witnessed as President Trump made the state of emergency declaration on Friday afternoon going into the market close. We saw a +10% gain mostly made in the last 15 minutes of trading on Friday which indicates that there is an appetite to buy the dip from traders, but the weekend news cycle put them back in fear mode by the time markets re-opened today. Such a strong fear mode that not even the Federal Reserve’s second emergency interest rate cut within a week-which took the Federal Funds rate down to 0%-nor the announcement of a return to Quantitative Easing could ease. Markets are beginning to look very oversold in the short-term and I’m thinking we could see a technical bounce off of the lower wedge line if enough technical traders are still around and watching the charts. Along with the lower wedge line, there is also the horizontal support/resistance line stemming from the 2015 price peak which was created when the Federal Reserve announced monetary tightening by raising interest rates back then. Traders became fearful as rates went up as they feared it would slow economic growth, but ultimately began buying again as forward guidance from the Fed eased their fears. This red trendline is also another technical level where traders could be tempted to buy due the severe oversold conditions we are seeing, and due the fact that previous resistance levels normally turn into support in technical analysis. Treasury Secretary Steven Mnunchin has also been working at a fast pace to provide some fiscal stimulus to the economy which is what traders mostly want to see aside from just Federal Reserve intervention in the banking sector. Fiscal stimulus would add much needed relief to not only struggling companies, but also to the American consumers via deferred tax payments for companies as well as a complete payroll tax suspension for employers through the rest of the year. The expected fiscal stimulus amount is $800 billion, but Mnunchin and other economic officials could surprise markets with an even larger amount in economic relief which wouldn’t be too surprising considering that we’ve recently seen the Federal Reserve surprise markets with two emergency interest rate cuts within a week as well last weeks surprise announcement of $1.5 trillion in REPO. If we get a combination of a price test of the lower wedge line along with more solid details of the economic relief package being pushed through the House this week it would give both technical and fundamental traders cause to buy at the same time which more than likely would lead to a record-breaking move to the upside. Whether or not that potential bounce would hold would largely depend on the coronavirus though. That is still the major unknown in markets right now and if case and death rates in the US continue higher and lead to more states shutting down, or potentially the entire country, traders could quickly return to selling. For now the overall price trend remains down, but a bounce tomorrow or Wednesday is expected due to technical levels of support being reached and the expectation of a large amount of fiscal stimulus to be announced by Thursday. Current view has now changed from bearish to neutral due to oversold conditions along with the technical levels reached and expected fiscal stimulus
TVC:DJI
by PrepForProfit
ORBEX:BoJo Pushes for Election, Draghi Hints to Fiscal Measures!In today's #marketinsights video recording I analyse #GBPUSD and #EURUSD #FXMajors! GBPUSD Dragged down by: - BoJo push for an early election on December 12 - Increasing likelihood of October exit failure EURUSD Under Pressure as: - ECB reiterates downside risk, stubbornly low inflation - Draghi hints to fiscal policy measures Stavros Tousios Head of Investment Research Orbex This analysis is provided as general market commentary and does not constitute investment advice
by Orbex
Fiscal Deficits, Interest Rates and the US Bond YieldThe US fiscal deficit for the fiscal year 2018 was just reported to have increased to $779 billion, or approximately 4% of GDP for the period. As Reuters notes, the deficit has been the largest reported since 2012, during a time when elections were coming up and the economy was still at a low interest rate environment and perhaps also in need for more government spending. It is known that bond traders keep a close eye on fiscal and monetary developments. In the latest post on Fiscal Policy, I have commented how interest rates affect government finances but I have left one important piece out of the equation: how Fiscal Deficits themselves affect bond yields. Overall, recall that higher interest rates, or even expectations of higher interest rates, cause bond yields to rise, given that investors demand higher compensation for their money as interest rates increase. This leads to raising the cost of borrowing for the government, which in turn leads to higher deficits, all else equal. Naturally, it could most likely be the case that interest rates have increased because of improved economic conditions and hence more taxes will be flowing in to cover for the raise in the bond yield. Another important point is that fiscal deficits tend to also increase bond yields simply because there is more debt running for the same amount of investor funds. As such, investors can potentially gain higher compensation as demand for their funds has increased. Furthermore, the higher the deficit, the more unlikely it is that the state will remain able to meet its repayments. Consequently, higher, persistent deficits are indicative of higher risk in the economy as potential fiscal actions would need to be taken in the future, i.e. increases in taxation or spending cuts. This surge in non-payment risk is bound to increase yields as well. In the case of the US, the current situation is indicative of both happening at the same time: the government keeps maintaining a large fiscal deficit and the Federal Reserve is on a bout of interest rate increases which should not end soon. The policy-important question is what happens to the economy when the government is forced to slash spending or increase taxation in order to maintain a sustainable fiscal position. As studies have shown, drops in spending can result to approximately one-for-one reductions in the GDP growth rate, although this effect is mostly observed in periods of recession. Still, in the US case, even a 0.5% drop in GDP growth for a 1% reduction in government spending could have important effects on its growth potentials, especially if it also constraints fiscal space during a recession. The US bond yield has been reflecting these developments as its price has been declining, which suggests that the bond yield is increasing. In fact, the combination of the two effects has sent the yield at more than 3% in September, for the first time since 2011. Dr Nektarios Michail Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
UEducation
by HotForex
BOJ EXPECTATIONS: EXCEED/ HIT - LONG USDJPY; MISS - SHORT GBPJPYBOJ Miss - Sell GBPJPY @Market price; 129tp1 - up to 800pips. 1. A BOJ miss can be considered as delivering the median expectations e.g. 10bps cut to the depo (-0.2%), 10bps cut to the LSP (-0.1%), Yen10trn increase in monthly JGB purchases & 50% Increase in Annual ETF purchases e.g. 3.3trn-5trn. Fiscal Stimulus Yen10-15trn. - The package above or less should be sold as the market expects this to maintain UJ at 105-6 level. - The short GBPJPY is a great trade anyway as you benefit from the BOE easing carry which should in turn move us to 125 (BOJ miss and BOE hit) - which the BOE 1m forward OIS rates market currently prices 25bps at 100% and the average expectations are 25bps and £50bn of QE (even more certain now as the BOE M. Weale - the most hawkish MPC Member moved to the easing side as Business optimism and PMI dropped to their 10yr lows) - thus GBPJPY can expect further downside even past the BOJ as the BOE is all but guaranteed to ease "most members expect to ease at the august meeting" - July BOE Minutes Quote. - Currently a BOJ miss is the most likely outcome - as many of you have seen in FX Yen has been brought aggressively as expectations have fallen, much a mirroring from the change in rates market where - For the 25th the 3m JPY Libor prices only a 6.65bps cut at to the key rate at 100% and on the same date the 3m euroyen August future prices only a 5.5bps cut at 100%. Though the further dated September 3m euroyen future prices a 9bps cut a 100% - likely a function of the market betting on more action being done in the september meeting (which makes sense). BOJ HIt: Buy USDJPY @Market price; 107-111tp - up to 700pips 1. A BOJ Hit can be considered as double or more the median expectations (in my opinion) - 20bps+ to the depo, 20bps+ to the LSP, Yen20trn+ to the JGB Purchases and 100-200% extra annual ETF purcases from Yen3.3trn to 6.6/9.9trn. Yen20-30trn Fiscal stimulus. - The package above or more IMO will allow $yen to trade to 111, and for a sustained amount of time. - The long USDJPY is the best proxy to play the "over-delivery" imo as USD is the most stable base, and has the most pips to gain on yen weakness - given FOMC hawkishness/ Hiking expectations give USDJPY topside even more impetus. - As above, the markets currently DON'T expect this result, as $Yen trades at the 104 level and rates markets price only 5-6bps of lowering. HOWEVER, if BOJ/ JPY Govt are to deliver a big easing package - one that smashes expectations (such as the one above) it will be now. The reason I think this is the case is below:
by QuantumLogicTrading
11
LONG USD VS JPY, EUR, GBP: HAWISK FED BULLARD - FED FUNDS RALLYBullard is the lone Fed official forecasting just one additional rate increase, and expects modest growth over the next two and a half years. But he reiterated Tuesday he's not expecting the economy to head south. However, did go out of his way to mention a relatively dovish point "We Have Some Ammunition if We Need it During Next Recession". Nonetheless he remained hawkish net on the margin, reiterating FED Georges hawkish comments regarding the labour market "About as Good as It's Ever Been", whilst using the June NFP print to flatten any questions regarding the low May print saying "Strong June Jobs Gains Showed May Report Was 'An Anomaly'". Similarly Bullard continued with Georges sentiment of the US's post-brexit robustness stating that the "Market Reaction to Brexit Shock Was 'Satisfactory,' 'Orderly'" - and infact surprisingly pushed this hawkish brexit sentiment on to new levels of "Ultimately the Brexit Impact on U.S. Economy Will be 'Close to Zero'". This is perhaps the most hawkish/ upbeat statement i have heard form a key Fed member since the decision which is positive given Bullard's naturally dovish stance. Bullard also stressed the need for a solid US Fiscal package to boost demand, where i have to say fiscal stimulus has almost gone forgotten about in the last 7-years post crash, given the dominance of the central banks, quoting "U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth". Once again todays "FED speaker tracker" continues to add to my long $ view in the medium term. Today already we have seen front end rates continue their aggressive recovery this week, with the fed funds rate implied 25bps hike probability now trading for Sept/ Nov at a whopping 18% vs 11.7%Mon, with Dec trading at 36.3% vs 29.2%Mon . 10y UST (TNX) rates trade up another 4% today after a 5% gain yesterday, whilst 30yrs trade 3% up on the day (TNY) - as global risk rallies. Whilst USD is trading a little weaker in the immediate term as it readjusts lower for risk-on USD selling, long USD/ DXY is my medium term view as we continue to see the US FOMC Rate curve aggressively steepen, which is likely to continue for the next week at least - steeper implied curve means hike is more likely - more likely or realised hikes = increased (in the medium-term) dollar strength. Further, we expect dovish/ easing BOJ BOE ECB over the same period, this monetary policy divergence compounds the long $ view against its 3 biggest crosses (hence the long DXY expression) Medium term trading strategy: 1. The best expression of this medium term USD view is long DXY - as above I hold 8/10 conviction views for a number of the heavily weighted USD basket crosses based largely on likely monetary policy divergence in the medium term (FOMC Hiking whilst BOE, BOJ & ECB ease/ cut) e.g. LONG USDJPY @104 - 106.3TP1 109.5TP2; SHORT EURUSD @1.11 - 109.3TP1 107.5TP2; GBPUSD @1.34 - 131.2TP1 128.5TP2
Long
by QuantumLogicTrading
8