Posts with tag fed

INFLATION EXPECTATIONS SHOW HISTORIC DECLINE - Gold & Silver Building on Last Week’s Mojo

Guest Writer, September 14 2022

There's an encouraging sign that Americans view painfully high inflation as a temporary phenomenon, according to Courtenay Brown and Neil Irwin.

It comes in the form of another sharp drop last month in how steep consumers expect inflation to be in the upcoming years, as shown in the New York Fed's latest Survey of Consumer Expectations.

Expectations for the level of inflation over the next year fell by about half a percentage point in August – a historic monthly decline in the survey's nine-year history and second only to July's record-breaking drop.

Consumers' expectations for year-ahead price increases for gasoline also saw another sharp drop. Now, consumers expect gas prices to be roughly the same a year from now.

The Fed's huge fear is that consumer expectations for steep inflation will become a mainstay of the economy, which could force them to act in ways that would help inflation spiral upward. 

For what it's worth, that worst-case scenario doesn't appear to be materializing.

Respondents also aren't nudging up expectations for higher wages in the future. For the eighth straight month, earnings growth expectations held at 3%.

Even as inflation expectations move in the right direction, the survey shows consumers expect inflation to be much higher than the Fed's 2% target in the years to come.

Economists expect that the CPI – out tomorrow – will show that prices fell by -0.1% in August.

Core inflation – which strips out more volatile food and energy prices – is expected to have risen by 0.3%, matching July’s pace.

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TRICK OR TREAT? Gouls and Goblins Handing Out Higher Interest Rates

Guest Writer, November 2 2022

As you were handing out candy to – or walking the ghostly neighborhood among – the Nemos, Princess Ariels and Lightning McQueens, the Gouls and Goblins were scheming.

In fact, the fix is in – for another 75-basis point hike in the Fed Funds interest rate, that is. The horror of it all!

Even though 11% of Fed futures traders believe the Fed will raise its target rate by a mere 50 basis points on Wednesday, a 4th-straight increase of 0.75 percentage points is locked in. 

The Federal Reserve just can’t help itself.

But Courtenay Brown and Neil Irwin say the more important thing to watch is what Fed Head Jerome Powell says at his post-meeting presser about what comes next.

They add that Powell and Co. face “a delicate balance” between signaling to Wall Street on the one hand that they will eventually slow down to “a more cautious pace of tightening” – without appearing to no longer being as committed to bringing down inflation on the other.

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Boom!

Bob Rinear, November 12 2022

So, we talked about two things this past Wednesday, 1) are we looking at a “melt up” into year end and 2) what were we going to get with the CPI.

My feeling was simple. This is what I said:  “So, the median call is for the CPI to come in +7.9%. The question is, what happens if it's higher or lower? If we get a lower reading of say 7.6 this market will rally hard. Maybe it would be short lived, but up we would go. “

Well I missed by a tenth, the report came in at +7.7%. And what happened? The market went nuts. We had the futures trading up 1000 points on the DOW before the open and we put in a 1,200 point DOW day.

Why? The current theory is that inflation has peaked, and this will give the Feds the green light to just do maybe one more 50 basis point hike and then go into pause mode. They thought the concept was just marvelous and they ran with it. Bigly so to speak.

First off let’s get a few things straight. The inflation we’re suffering from wasn’t because of overheated buying by us peon’s. It has TWO root causes. 1) the insane money printing/QE baloney the feds have been hammering us with for 12 years and 2) the insane supply chain disruptions resulting from them unleashing their bioweapon bullshit on us.

The money creation IS the very textbook definition of inflation. You don’t have to be a fellow of Lucasion mathematics to understand that. In fact if you go to dictionary.com and look up the word inflation, this is what you find:

Noun.

Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

And there you have it. An increase in the volume (amount/printing) resulting in the loss of value of the existing currency. Bingo, give the dictionary a big cigar.

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INFLATION EXPECTATIONS ARE FALLING AGAIN… Should We Even Care?

Guest Writer, December 14 2022

As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.

According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.

Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.

The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year. 

The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”

According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”

As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.

That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March. 

As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.

Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump. 

Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.

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Fed Tightening to Get to 2% Inflation Could Add 9 Million to Jobless Rolls

Guest Writer, December 17 2022

Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.

In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.

They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.

The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:

(1)  The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and

(2)  As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.

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Distressed Debt Jumps 300% in 2022

Guest Writer, January 4 2023

Sorry for the cliché, but the more things change, the more they remain the same. 

Nowhere is this more painfully obvious than in the financial industry – where cracks are expanding in already porous credit dykes all over the world.

You think we'd have learned from the disastrous effects of the Great Recession 15 years ago.

But after additional years of excess from banks stuck with piles of buyout debt, a pension blow-up in the UK and real-estate troubles in China, South Korea and more recently the U.S., we’re finding again that what’s past is prologue.

Thanks to global central bank rate hiking, cheap money is quickly becoming a thing of the past. 

Distressed debt in the U.S. alone jumped more than 300% in 12 months, according to Bloomberg News.

Plus, high-yield issuance is much more challenging in places like Europe, and leverage ratios have reached record levels.

The aggressive rate hikes have dramatically changed the landscape for lending – stressing credit markets and pushing economies toward recessions, a scenario that markets have yet to price in.

Nearly $650 billion of bonds and loans are distressed, according to Bloomberg. 

It’s all adding up to the biggest test of the stress tolerance of corporate credit since the 2008 financial crisis and may be the spark for a wave of coming defaults.

Will Nicoll, chief investment officer at M&G, said, “It is very difficult to see how the default cycle will not run its course, given the level of interest rates.”

Banks say their wider credit models are proving robust so far, but they’ve begun setting aside more money for missed payments.

Loan-loss provisions at systematically important banks surged 75% in the 3rd quarter compared to 2021 – a clear indication they’re preparing for payment issues and defaults.

Most economists see at least a moderate GDP slump over the coming year. 

Some, like Paul Singer of Elliott Management, however, fear a deep recession could cause significant credit issues because the global financial system is “vastly over-leveraged.” 

Citigroup economists believe rolling recessions are likely across the globe next year, with the U.S. likely to slip into one by the middle of next year.

Mike Scott at Man GLG warned that “markets seem to be expecting a soft landing in the U.S. that may not happen.”

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Upside Down

Bob Rinear, January 6 2023

The equities market is a very strange beast, it truly is. Let's take Friday for example.

The fed has been pretty straight forward in telling you that they are going to hike rates until they get up and over 5%. Despite the howls from the market participants, Powell has also said that there would be no rate cuts in 2023.

But Wall street doesn't believe him. See, they've got all this history about the Fed, and for decades the play was always the same. Fed hikes rates to cool down an economy, overshoots, panics and then starts cutting rates.

When rates are being cut, stocks move higher. Why? Companies can borrow more money at a cheaper price. They can use that money to buy up their own shares, and thus reduce the float and therefore push the stock price higher.

Wall street LOVES low rates and the evidence is easy to see. Look at what the DOW has done since 2010. After the 08/09 financial crisis, the fed went into panic mode and printed money like madmen. Do you know where the DOW was in 2010? 

No, really.... think about this for a minute. The DOW Jones has been in existence since 1896. Did you know it was that old? Yessirree it is. And from 1896 all the way to 2010 the best it could do, was end the year at 10,600.  That's it. 10K in over 100 years.

From 2010 to 2022 it made it to 34,561.  Now the back of the cocktail napkin tells me that this is a gain of about 24,000 points.

So, if it took 114 years to go from its humble beginning of 12 stocks, to the current 30 stocks in 2010 and only gained 10K points... why did we gain 24K points in just 12 years? What changed?

You all know the answer to this riddle. Zero interest rates and trillions of freshly minted/printed dollars, that's what.  If the fed is cutting rates, and/or keeping them there, AND printing trillions at the same time, the market gets orgasmic and up it goes. We have the proof, it's there in black and white.

But the fed has changed course now, and has been aggressively hiking rates. Well that's sort of peeing in their punchbowl and they hate it. That's why in 2022 we saw the S&P down 20% and the debt heavy NASDAQ down 34%. 

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