Economics and Banking – Page 3 – Digital Finance Analytics (DFA) Blog

Rate Pause Perhaps, But Not A Cut Anytime Soon In Canada!

Sometimes, we see clearer looking in on another economy, and the dynamics in Canada are mirroring Australia, and New Zealand, so when the Bank of Canada Governor Tiff Macklem discussed the latest Monetary Policy and decision, it was relevant more broadly.

They held target for the overnight rate at 5% and warned that while rates might have to go higher if inflation reaccelerated, their base case was a pause, for some time, waiting the for effects of higher rates to pull inflation into target – a target not expected to be met for some long time. The Bank is also continuing its policy of quantitative tightening.

Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.

The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.

They called out risks to this forecast:

First, inflation expectations have come down only very modestly over the past few quarters. If households and businesses continue to expect inflation to stay elevated, this could impede the pace at which price and wage growth moderate.

Second, wages have been increasing at a fast pace relative to productivity growth. On average, consumers’ real wages are higher than they were in 2019. Productivity growth is effectively stalled and wages are still rising robustly. Because of this, the Bank remains concerned that cost pressures could add to inflation.

Third, house prices could also rise more than anticipated. This would increase inflation by raising shelter costs. While the base case includes a modest increase in house prices, this forecast is subject to a high degree of uncertainty. This risk could materialize if easing financial conditions lead to stronger-than-expected demand for housing while supply remains constrained.

The conflict in Israel and Gaza and attacks on ships in the Red Sea are affecting seaborne trade in the region and could push oil prices and shipping costs higher. So far, global disruptions from these developments have been contained. But if the conflict were to spread further, oil prices could rise sharply and the prices for traded goods could also increase significantly.

In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Bitcoin Gets The SEC’s Spot Tick – But Caveat Emptor!

The Securities and Exchange Commission has for the first time approved exchange-traded funds that invest directly in Bitcoin, a move heralded as a landmark event for the roughly $1.7 trillion digital-asset sector that will broaden access to the largest cryptocurrency on Wall Street and beyond.

Now much is resting on the concept that the futures market has already brought crypto assets sufficiently into the financial mainstream.

The SEC was frankly bounced into this decision in response to the loss of some critical legal cases, and puts Bitcoin ever closer to existing financial services players. This does not necessarily mitigate risk.

SEC Chair Gary Gensler said “While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin,”. “Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”

Crypto zealots have for years argued that a so-called spot fund that invests directly in Bitcoin would be beneficial to investors and would help bring the industry closer to the more highly regulated world of traditional finance. It also suggests a sort of milestone of maturity for the relatively nascent industry, where skirmishes with regulators came to a climax after the collapse of Sam Bankman-Fried’s FTX empire highlighted risks lurking in the industry.

But of course, by definition, the mainstream approval this represents cuts right across the original ideology of Bitcoin already compromised by the significant use of derivatives, and becoming ever more controlled by large financial institutions and regulators.

Even after Gensler went to such lengths to say that the SEC wasn’t giving any seal of approval to Bitcoin, the odds remain that this will expose many more people to crypto’s risks and opportunities. So Caveat Emptor! Let The Buyer Beware!

A Year In Review: A Two-Year Journey To Nowhere!

This is our annual review of the financial markets, and weekly update.

As we close out 2023, the analysts are talking about the great market rally in the year (perhaps conveniently forgetting the falls of 2022.) The S&P 500 slipped in the final session of 2023 to end the year up 24 per cent, but the two-year trip is back to where it started. The Dow Jones Industrial Average and the Nasdaq Composite both dipped on Friday but were 13.7% and 43.4% higher for the year, respectively, while MSCI’s world share index posted a 20% gain, its most in four years.

True, this year might go down as one of the most unusual ever in financial markets – mainly because everything seems to have come good despite a lot of turbulence and many predictions turning out to be wrong. And this against the backcloth of more regional conflicts, pressure on the consumer, and rising Government debt.

U.S. Treasuries finished the year broadly where they started after major swings for the benchmark in 2023. In the bond markets, just a few months ago investors were expecting the Fed & Co to raise rates and leave them there while recessions rolled in. Now bond markets are looking to central banks to embark on a rate-cutting spree with inflation apparently beaten.

Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the US economy slips into even a mild recession, according to Royal Bank of Canada’s fund management arm.

The greatest risk to the stock market in 2024 (bonds & metals) is the scaling down of market expectations for rate cuts as a result of renewed gains in inflation. Any credible and consistent signs of renewed inflation (not one-off bounces or base effects) would be punishing for markets.
But even if you think the probability of such inflation rebound is minimal, there is always the typical volatility in a US presidential election year.

According to seasonality studies stretching to 1900, April and May tend to be challenging months during US election years, but October fares worst as far as consistency of selloffs.

A third risk is that of persistently swelling budget deficits and the ever-expanding amounts of new debt issues to refund existing deficits. This could easily ignite another “bond market event” similar to September 2019, March 2020, or September 2022 in the UK.

Regional conflicts might well proliferate, causing more market turmoil. And finally, next year won’t be quiet on the political front. There are more than 50 major elections scheduled next year, including in the United States, Taiwan, India, Mexico, Russia and probably Britain. That means countries that contribute 80% of world market cap and 60% of global GDP will be voting. Taiwan kicks it off with elections on January 13, followed just a few days later by the New Hampshire primary for the 2024 U.S. Presidential race.

And remember from just before that stock panic in late February 2020 to mid-April 2022, the Fed ballooned its balance sheet an absurd 115.6% in just 25.5 months for crazy-extreme monetary inflation! Other central banks did the same. That monetary base more than doubling in a couple years is the dominant reason inflation has raged in recent years. The FOMC finally realized how dangerous its extreme monetary excesses were in mid-2022 as reported inflation soared. So the Fed has shrunk its balance sheet 13.8% since then. Yet crazily over these past four years, that monetary base has still skyrocketed 85.4% thanks to the previous decade’s growth! Inflation therefore is still in the system, “This is an era of boom and bust,” BofA said. “We are not out of the woods.”

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Christmas Greetings From The DFA Crew…

A short segment, as the studio hands join in the chorus: Wishing you all a Happy Christmas!

Warning includes weird sounds…!

Markets Gyrate Into Christmas After A Two Year Round Trip!

This is our weekly market update.

In the last trading day before the Christmas break, U.S. stocks gyrated to a mixed close on Friday having digested cooler-than-expected US inflation data which firmed bets for Federal Reserve interest rate cuts in the new year.
That said, all three indexes turned less decisive in light trading as the afternoon progressed, after an initial rally on data showing inflation is easing closer to the U.S. central bank’s target.

The Dow Jones Industrial Average fell 0.05%, to 37,385.97, the S&P 500 gained 0.17%, at 4,754.63 and the Nasdaq Composite added 0.19%, at 14,992.97. Small caps handily outperformed the broader market, with the Russell 2000 ending up 0.8%.

Of the 11 major sectors in the S&P 500, consumer discretionary was the sole loser, while consumer staples enjoyed the largest percentage gain.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

The Great Australian Savings Account Rip-Off!

If you have savings with a bank in Australia, it is highly likely you are being ripped off. After all, Australian Consumers depend on retail deposit products to conduct their everyday banking, to safely store over $1.4 trillion of their savings and, importantly, to earn a decent return on these funds.

However, as I have been highlighting in recent shows, changes in the cash rate (often referred to as the ‘official interest rate’) via the RBA, and which is the rate paid on lending between banks in the overnight cash market only indirectly affect the cost of funding from retail deposits and the interest rates paid on retail deposit products.

Banks are quick to lift mortgage rates on mortgages, but have been significantly less market driven in terms of deposit rates, with many savers loosing out. Yet relatively few consumers switch deposit products, despite there often being a range of alternative products offering better interest rates and conditions. This loyalty tax means consumers earn significantly less than they should, over all on deposits, which boosts bank profits significantly.

So now the ACCC just completed a report on Retail Deposit Account. They gathered information, and documents on retail deposit products supplied by 14 of the largest banks in Australia. These banks collectively hold more than 90% of household deposits in Australia. This included seeking information directly from these banks as to their retail deposit products and from APRA and RBA, as well as reviewing the information available to the public on the banks’ websites.

The ACCC findings highlights that despite the importance of transaction accounts, savings accounts and term deposits, the ongoing challenges consumers face in searching for, comparing, and switching between products means that consumer engagement with the market for retail deposit products is relatively low. This low level of engagement means many consumers miss out on earning more from their savings.

Widespread strategic and selective pricing also adds difficulty for consumers when seeking to locate key product information and compare market offerings. This lack of transparency may also damage consumer confidence in the market.

Given the range of factors that banks take into account and the strategic pricing approaches they employ when setting their retail deposit rates, the interest rates received by consumers do not automatically follow movements in the cash rate target.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/