Economics and Banking – Page 6 – Digital Finance Analytics (DFA) Blog

Markets Rethink Rate Cuts As Central Bank Hawks Jawbone!

It’s become a bit of a ritual, as members of various committees linked to Central Bank interest rate decisions speak in the open spaces between policy meetings. This week, Washington has been the centre of gravity thanks to the IMF conferences.

Markets are hypersensitive at the moment, having been baying for rate cuts all year, and positioning accordingly, despite the data is pointing elsewhere. But now, Money managers and strategists on Wall Street have been forced to rethink their assumptions over the past two weeks in response to strong economic data and remarks by Fed officials.

For example, Federal Reserve Bank of New York President John Williams said that there’s no rush to lower interest rates and economic data will determine the timing.

And Bank of England policymaker Megan Greene speaking at an Atlantic Council event on the sidelines of the International Monetary Fund’s meeting in Washington, said the UK faces difficult trade-offs over whether to cut interest rates because underlying inflation remains high and growth is weak.

But Greene said rate cuts were not imminent and the combination of high inflation and weak growth means “we are sort of in trade-off territory.”

In Australia, after the latest jobs data rate cut expectations are also being pushed out. Andrew Lilley the chief Rate Strategist at Barren joey said “There’s no impetus for the RBA to cut rates as inflation is outside of the 2 per cent to 3 percent band. The RBA will be very comfortable to sit on hold.

But even if rates go no higher, the RBA says total scheduled household mortgage payments (comprising both interest and scheduled principal payments) have increased to around 10 per cent of household disposable income as of December 2023, exceeding the estimated previous historical peak in 2008. These scheduled mortgage payments are expected to increase further to reach around 10½ per cent of household disposable income by end-2024 as more fixed-rate loans expire and reprice at higher interest rates.

http://www.martinnorth.com/

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

The Real Costs Of Migration!

In an increasingly globalized workforce — which intensified in the wake of Covid-19 as nations looked to fill acute worker shortages — New Zealand is a desirable destination. It was ranked the most attractive nation in the OECD for skilled migrants, according to a 2023 report by the Paris-based organization, which rated the country highly in categories such future prospects, family environment and inclusiveness.

But the volume of arrivals is now raising concerns about pressure on infrastructure, rising house prices and the ability of the economy to meet the extra demand for goods and services. That could in turn fan inflation, compounding the strains.

“Very strong population pressures will continue to stress the economy,” said Kelly Eckhold, chief New Zealand economist at Westpac in Auckland.

The Reserve Bank of New Zealand has picked up on the trend, citing the impacts of high immigration on house prices and rents. That may see it hold its benchmark rate at 5.5% until the end of this year or into 2025, even if global peers begin to lower theirs, though even that is less certain now.

And as we look are Ireland, the UK and Australia, its the same story. High migration lifts housing costs and drives inflation. Time for politicians to flex their strategies, as New Zealand and Canada have already done!

http://www.martinnorth.com/

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

The Week The World Changed…

This week will I think mark a critical turning point across markets, as the higher for longer mantra finally took root on sticky inflation fears, geo-political tensions flared and the first flush of 1Q US results highlighted pressures on earnings ahead. All this drove a flight to the safest corners of the market such as bonds and the dollar while equities fell. Oil rallied but Wall Street’s “fear gauge” – the VIX – spiked to levels last seen in October with a surge of 16 per cent.

It’s hard to unpick the prime reasons for the falls, but US Equities had their worst day since January. The report that Israel was bracing for an attack by Iran on government targets certainly did not help. US President Joe Biden said he expects Iran will attack Israel sooner rather than later – and his message to Iran is “don’t” do it. A direct confrontation between Israel and Iran would mean a significant escalation of the Middle East conflict and would lead to a significant rise in oil prices, according to Commerzbank.
Escalating geopolitical tensions, also including attacks on Russian energy infrastructure by Ukraine, have spurred bullish activity in the oil options market. There’s been elevated buying of call options – which profit when prices rise – in recent days, with implied volatility jumping.

Also, Investors have pushed back their expectations for the start of the Fed’s easing cycle as March nonfarm payrolls crushed expectations and US inflation climbed to 3.5%, up from 3.2% and above the forecast of 3.4%. The markets have lowered the odds of a June cut to just 24%, compared to 54% a week ago. A September cut was priced in at 91% a week ago but that has dropped to 72%, according to the CME FedWatch tool.

Fed members are sounding hawkish and the markets have slashed rate cut expectations. Fed Bank of Boston President Susan Collins reiterated she sees no urgency to cut rates in the near term, given elevated inflation and the resilience of the labor market. Her Chicago counterpart Austan Goolsbee repeated that housing inflation will need to come down in order for overall prices to cool to the central bank’s target.

Meantime banks’ results offered the latest window into how the US economy is faring amid an interest-rate trajectory muddied by persistent inflation as JPMorgan Chase and Wells Fargo both reported net interest income that missed estimates amid increasing funding costs. Citigroup’s profit topped forecasts as corporations tapped markets for financing and consumers leaned on credit cards – signs that a prolonged period of elevated interest rates will benefit large lenders.

“Many economic indicators continue to be favourable. However, looking ahead, we remain alert to a number of significant uncertain forces,” JPMorgan’s chief executive Jamie Dimon said. He cited the wars, growing geopolitical tensions, persistent inflationary pressures and the effects of quantitative tightening.

And the latest economic data did little to alter the reduced risk. The Michigan consumer sentiment index fell to 77.9 in April from 79.4 a month earlier, missing forecasts of 79.0 and the data also showed that the 1-year inflation expectations and 5-year expectations rose to 3.1% and 3% respectively, piling on worries about higher for longer interest rates.

So all up, MSCI’s gauge of stocks across the globe was last down 1.2%, its biggest one-day drop in about six months, dragged down by U.S. performance. Wall Street’s main indexes all slumped well over 1% with the S&P 500 posting its biggest one-day drop since Jan. 31. The Dow Jones Industrial Average fell 1.24%, to 37,983.24, the S&P 500 lost 1.46%, to 5,123.41 and the Nasdaq Composite lost 1.62%, to 16,175.09.

http://www.martinnorth.com/

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

The FED’s Narrow Path Just Got Pot-Holed!

Higher for longer is back baby, following the latest CPI data from the Bureau of Labor Statistics which came out today, for March. It was significantly up on expectations, the third month in a row this has occurred. This signals a fresh wave of price pressures that will likely delay any Federal Reserve interest-rate cuts until later in the year, or even later into next year.

http://www.martinnorth.com/

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

Could The Bumps In The Road Turn To Potholes And Rate Rises Ahead?

This is our latest weekly market update.

Last Wednesday, Fed Chair Jerome Powell retained a cautious stance towards future rate cuts in a speech to the Stanford Graduate School of Business. “Recent readings on both job gains and inflation have come in higher than expected,” he said, suggesting that the U.S. central bank will continue to study more data before starting a rate-cutting cycle.

Atlanta Fed President Raphael Bostic, a known hawk, said rates should likely not be reduced until the fourth quarter of this year, with only one cut likely in 2024. “We’ve seen inflation kind of become much and more bumpy,” Bostic said. “If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP and employment, and a slow decline in inflation over the course of the year, I think it will be appropriate for us to start moving down at the end of this year, the fourth quarter.” But on Thursday, Minneapolis Fed President Neel Kashkari said rate cuts might not be required this year.

Then we got data on Friday showing US payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that’s powering the economy. Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months. The unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job as participation rose.

Some are now seriously asking whether rates are high enough to quash inflation. A rate hike would really change the market dynamics. That said, Alice In Wonderland like, many analysts still seem to be wired into a rate cut soon.

http://www.martinnorth.com/

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

Can You Trust Your Bank In A Crisis?

Banking is a game of confidence, in that if fears of a potential bank collapse arise, then naturally people who hold money at that institution will try to grab their cash, and run. The Global Financial Crisis, where many banks were saved by the use of public funds.

But this means taxpayers are on the hook, and so post the GFC, there were attempts to develop alternatives which would transfer risks from the tax-payers to other parties, including shareholders bond holders and even depositors of an affected bank. The so called bank resolution – or living will – includes the deposit bail-in regimes which were proposed (initially by merchant bankers by the way) and adopted by the G20 to allow deposits held at banks to be grabbed and converted to equity. This happened of course in Greece a few years later.

In the IMF Global Stability Report from October 2023, there was a section which highlighted that the March 2023 bank runs in Switzerland and the United States were unusually large and fast with their speed and size facilitated by rapid online deposit withdrawals and the rapid spread of worries among important groups of depositors via social media and other digital channels.

I am often asked if bail-in is a real risk to savers, and my reply remains the same. It’s a theoretical risk for sure, thanks to the likes of the IMF and others, but practically, its unlikely to be activated because the collateral damage would be enormous. But understand that those bankers who dreamed up bail-in and the QANGO’s who are pushing it, are still pushing Governments to give the financial regulators ever more power, never mind democracy. Its a cautionary tale of who is actually calling the shots, and the risks to democracy are real.

http://www.martinnorth.com/

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

The Fight For Cash Just Got Terminally Serious!

Despite cash being legal tender in Australia, surprisingly it is legal for businesses to refuse to accept it provided that they inform consumers of their stance before any “contract” for the supply of goods or services is entered into.

The war on cash has taken an interesting turn, with the RBA being questioned by the Senate Inquiry into Regional Bank Branch closures, and claiming the use of cash had fallen, but frankly on thin and filtered evidence; while Armaguard, Australia’s only cash-in-transit business is facing the prospect of collapsing due to the claimed declining use of cash. The RBA, which regulates the payments industry and is responsible for printing money is also involved in the crisis talks.

And a social media campaign, led by the Cash is King Facebook group is calling on Aussies to withdraw and use cash next Tuesday, April 2, in protest against the shift to digital payments. The protest is aimed at showing Australia’s banks and retailers that there is still a demand for the use of cash in society. That is, if you can still find an ATM.

So, action on Tuesday to grab some cash could be an important step on the road to saving cash for All Australians who want to use it, despite pressure from the Government who is responding to huge pressure from the commercial banks. This in turn puts massive pressure on the current Senate review, who is scheduled to hold one more community hearing on Bribie Island on the 16th April. Will the committee who has laid bare the issues of branch closures and removal of cash come good or hook their final report like the earlier Royal Commission Inquiry into Financial Services, which exposed major issues through their hearings, only to turn to water in their final report and recommendations, which allowed the banks to behave business as usual. This time all eyes will be on the Senate.

http://www.martinnorth.com/

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

Central Banks In Wonderland…

In a mega week for Central Bank news, after the seminal but small rise from the Bank of Japan into positive territory for the first time in eight years, the all options on the table no change from the RBA, the expected hold from the Bank of England, and the surprise 0.25% cut from the Swiss National Bank, the first such reduction for one of the world’s 10 most-traded currencies since the pandemic abated, we got the fully Monty from the FED, with another no change decision.

The recent poor inflation numbers have only nudged the governors a little in the hawkish direction; it will take more of a pickup in prices to jolt enough members away from three cuts this year, or perhaps less…

http://www.martinnorth.com/

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