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European Central Bank Preview – Time to PivotDespite facing the unknown external shock of a war, the Eurozone economy’s growth has been resilient in the first three quarters of the year. Eurozone Gross Domestic Product (GDP) rose by 0.3% quarter-on-quarter (QoQ) in Q3, easing from a 0.8% increase in Q2 2022 aided by the rise in government spending alongside an improvement in inflation adjusted trade surplus . However, this is likely to change in Q4 2022 and Q1 2023 as COVID reopening demand fades. Eurozone recession remains a key risk until Q1 2023 Europe is set to embark on a harsh winter, and with savings rates extending the decline from a 1.7% drop in Q2, consumer spending is likely to come under pressure. The 1.8% month on month falls in euro area retail sales in October is consistent with the notion that real income squeeze is now catching up the with consumers. Services spending rose only 1.5% in Q3 compared to the 3.1% jump in Q2 2022 . The labour market has remained fairly resilient as Eurozone unemployment hit a new low of 6.5% in October, pushed down by falling unemployment in Southern Europe, the Netherlands, Finland and Austria. However, unemployment is likely to rise as the economic slowdown and tightening financial conditions impact hiring. That being said, fiscal policy could come to the rescue as major Eurozone governments have earmarked €573Bn into the economy to shield the private sector from the upcoming fallout in economic activity. Inflation in the Eurozone declined more than expected from 10.6% in October to 10% in November. Yet it’s hard to say for certain that the inflation rate has passed its peak as it is largely dependent on the fluctuations in energy prices. Core inflation remained at 5% in November and is likely to remain close to 5% through Q1 2023 . Companies continue to transfer higher input costs to consumers and in spite of an approaching recession, we expect this process of cost-push inflation to extend into 2023, keeping price pressures higher for longer. European Central Bank (ECB) split between the doves and hawks Ms Isabel Schnabel (a member of the executive board of the ECB) warned in November that loose fiscal policy risks adding to underlying inflation pressures by boosting consumption and reducing the incentive for consumers and businesses to save energy. We would argue that while the volume of relief packages is large, they are insufficient to provide complete relief for all consumers and companies. Ms Schnabel also noted that, “that the room for slowing down the pace of interest rate adjustments remains limited, even as we are approaching estimates of the ‘neutral rate’”. This hawkish sentiment was echoed by Dutch central bank head Klaas Knot in his statement that risks are tilted towards the ECB doing too little to combat rising inflation, noting that an economic slowdown, or perhaps even a recession, is needed to bring inflation under control. President Lagarde stressed that she would be surprised if inflation has already peaked, as there is too much uncertainty regarding the pass-through of high energy costs at the wholesale level into the retail level. She added that the ECB may have to go into restrictive territory with key rates. On the other hand, the head of the French central bank, Villeroy, who has often anticipated the actual ECB decisions in his statements, spoke out in favour of 50 basis points. Even hawks such as Bundesbank President Nagel and Estonian Mueller seem to be able to come to terms with a hike of just 50 basis points. Further clarity on Quantitative Tightening (QT) The ECB is likely to meet consensus expectations this week of narrowing the pace of rate hikes to 50Bps on 15 December, following two 75Bps rate hikes in September and October. This decision will lift its deposit and refinancing rates to 2% and 2.5% respectively. Neither peaking inflation nor a recession will give the ECB a reason to hold back from raising rates in Q1 2023, but both suggest that risks are tilted towards a slower pace of tightening. The outlook for the balance sheet, and more specifically QT, will be another key theme at this week’s meeting. It will be interesting to see whether the ECB will be pressed to sell bonds outright or stick with roll-off. We would expect the central bank to begin with an Asset Purchase Program (APP) roll-off equivalent to a monthly reduction of €25Bn in the balance sheet on average. Currently the ECB is still using Pandemic Emergency Purchase Programme (PEPP) reinvestments to compress spreads and the Transmission Protection Instrument (TPI) remains at its disposal if conditions deteriorate further. Both these tools limit how far the ECB can go with QT. Sources: 1Eurostat as of 30 November 2022 2National Accounts as of 30 November 2022 3Bruegel as of 31 October 2022 4Bloomberg as of 30 November 2022
FRED:ECBASSETSW
by aneekaguptaWTE
All Eyes On Fed Funds Rate 🏛Hello TradingView Family / Fellow Traders. This is Richard, also known as theSignalyst. I am not a fundamental expert (nor an economist) but I found FEDFUNDS chart really interesting! I never thought that basic technical analysis tools can also be applied to such economic instruments! As per my last analysis (attached on the chart) FEDFUNDS traded higher and broke the red wedge pattern upward. Now we are technically bullish, expecting big impulse movements to push price higher, and small bearish correction movements. We all know that Federal Reserve will most probably increase the interest rates by another 50 basis points (0.5%) next week (on Wednesday) By adding another 0.5% , FEDFUNDS will be approaching a strong resistance zone in blue (4.7% - 5.7%) which might hold the price down for a bearish correction to start and push price lower till the previous high in gray again. It would be interesting to hear your thoughts on this one. Always follow your trading plan regarding entry, risk management, and trade management. Good luck! All Strategies Are Good; If Managed Properly! ~Rich
FRED:FEDFUNDS
by TheSignalyst
18
S&P500 closes lower for fourth day as recession fears biteThe S&P500 index closed yesterday at its lowest point in four days following a steady decline as investors in American stocks concern themselves with the possibilities of a recession. The prestigious index which contains some of Wall Street's most heralded blue chip giants lost 1.44% to close at 3,941.26, while the Nasdaq Composite sank 2% to finish at 11,014.89. The Dow Jones Industrial Average dropped 350.76 points, or 1.03%, to settle at 33,596.34. The majority of the losses in this week's retraction in US stock values have been caused by bank stocks as well as shares in some media companies, which is perhaps in line with the concern about exposure to unserviceable debt by individuals and businesses should a recession bite. Investment banks are taking a cautious stance, and Morgan Stanley this week released news that it plans to make redundancies amounting to approximately 2% of its workforce, and whilst inflation in the United States has actually decreased and is now standing at around 7.7%, it is well over 10 in the UK and in some parts of Europe, where many large American corporations have substantial operations and have to fork out more capital to keep pace with the increasing price of everything from materials to logistical costs and wages. When considering yesterday's declines, the S&P is now down 3.2% this week and the NASDAQ has decreased in value by 3.9%. The Federal Reserve is still looking at interest rates and has taken a very conservative approach, but it appears that analysts and investors have not ruled out the possibility of a recession taking place across the United States in 2023, even if it is not likely to be to the same extent as the impending recessions in Europe and the United Kingdom. Disclaimer: This forecast represents FXOpen Companies opinion only, it should not be construed as an offer, invitation or recommendation in respect to FXOpen Companies products and services or as financial advice.
FRED:SP500
by FXOpen
Bond Market Signals Potential Trouble for the Federal ReserveIn recent weeks, the bond market has been sending a strong signal to the Federal Reserve: it may be making a serious mistake. The yield curve, which measures the difference in interest rates between short-term and long-term bonds, is currently more inverted than it has been since the early 1980s. An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. This can be a cause for concern because it can indicate that investors are expecting economic growth to slow in the future. When investors expect the economy to slow, they are less likely to lend money for long periods of time, leading to higher interest rates on short-term bonds and lower interest rates on long-term bonds. The current yield curve inversion has many experts worried. In the past, an inverted yield curve has often been a reliable predictor of a recession. In fact, every recession in the past 50 years has been preceded by an inverted yield curve. One reason for the current inversion may be the Federal Reserve's recent interest rate hikes. The Fed has raised interest rates several times in recent years in an effort to prevent the economy from overheating. However, these rate hikes may have had the unintended consequence of slowing economic growth. Despite the potential risks, experts believe that the current yield curve inversion may not be as concerning as it seems. They argue that other factors, such as the strong job market and low unemployment rate, suggest that the economy is still in good shape. In the end, only time will tell if the bond market's concerns are justified. However, the Federal Reserve will need to closely monitor the situation and be prepared to take action if necessary to prevent a potential recession.
FRED:T10Y2Y
by JoelWarby
2
HY-IG OAS Spread Significant Negative CorrelationHY= high yield option adjusted spread IG= investment grade option adjusted spread HY-IG Option Adjusted Spread showing significant inverse/negative correlation to the S&P500. When the HY-IG spread (white) rises we see the S&P500 (yellow) fall. The inverse is also true. Spread is currently trending down and SPX is rising which could be indicative of a short term shift towards a ‘risk on’ sentiment. Were the HY-IG spread’s trend to shift directions from down to up, we could infer that SPX would shortly after begin to trend in the opposite direction based on recent behavior. (not financial advice)
FRED:BAMLH0A0HYM2Education
by Firewalker_Charts
Is the US Economy Actually adding more jobs than expected?If you have been living under a rock for the past few days, unless you are not an economic savvy, the Bureau of Labor Statistics has released its newest Non-Farm Payrolls much above the expectation. The NFP rose by 263,000 last month, compared with an expected 200,000. At first, my reaction was that the FED will have to keep raising interest rates, especially as the US dollar reacted to this news by jumping 0.8%. However, I was skeptical as to how NFP jobs increased but the unemployment rate remained steady at 3.7% in an economy that is starting to experience drawdowns from inflation. So I made a research to analyze exactly what is going on. 1. What is happening in the US labor market? Today the NFP is at ~270,000 jobs, similar to mid-2018 when the labor market was defined as strong. It is much lower than the peak job creation in 2021 but 70,000 extra jobs compared to the expectation is a major difference. 2. What is happening with wage growth in the US labor market? Wage growth has increased by 0.6% month-over-month. This is way too strong for the FED's target of 2% in inflation. But why is it so high? Well, one of the reasons is that the supply of labor is not coming back. The participation rate remains way below pre-pandemic levels, even when accounting for an aging population. So if labor participation is low, job creation must be low to slow inflation, yet, the labor market appears to be healthy. Nonetheless, I wrote an analysis in October challenging the FED's data collection on job creation. "Once consumers have reached their credit limit, they will most likely look for another job. “About 38% of American workers have looked for a second job, while an additional 14% plan to” (LA Time, 2022). This justifies the reasons for more job creation in the U.S. economy as emphasized by the Biden Administration and the Fed, however, it is mostly people looking for a second or third job." Credit debt is increasing at an all-time high due to inflation. "U.S. households are spending $445 more every month due to inflation" (Lacurci G, 2022). So those who cannot keep up with their bills have to work more jobs or extra time. This makes total sense, especially when the Household Job Survey shows no jobs added in the past 8 months, while the Establishment Survey shows 2.7 million jobs added, which is the one used by the FED. Why such a large difference between the Household Job Survey and Establishment Survey? The answer lies in how the different surveys are run. For instance, the household survey counts people holding multiple jobs as one employed person. While the establishment survey counts all the jobs created, even if it is a second or third job. Based on the analysis I previously published, at least 700,000 Americans have had a second or third job in the last 12 months to make ends meet. 3. Where are jobs being created and lost? Being created: leisure, government, education, and healthcare. Being lost: goods, transportation, retail, construction, and utilities. Conclusion: The NFP survey is informing the market about Powell's next decision in December. The strong nominal wage growth and "strong" job creation argue there could be further rate hikes and hawkish talk from grandfather Powell. It is imminent before we will start to see weaknesses in the labor market. It is imperative to understand when will the turnover point of the labor market be and how bad to best position yourself, hence, we can start to see a FED pivot in early 2023 as the labor market weakens. This is for personal recording but feel free to comment and argue.
ECONOMICS:USNFP
by ssavi
USIRYY: Inflation has peaked. Fed Pivot incoming? I'm not a macroeconomics guru or T.A. guru, and these charts are weird considering the only timeframe we have access to is the monthly line chart +. USIRYY has wicked into the golden pocket + 1.618 fib extension with Monthly RSI going into overbought territory + Monthly MACD cross. I'd be a lot more confident about inflation topping with one more pump to the upside tagging the 1.618 fib at 9.5% with monthly bearish divergence on both MACD on RSI. Regardless, I believe inflation is topping around this area, 8-10%.
ECONOMICS:USIRYYShort
by CrashWhen
2