Markets were disappointed yesterday, as the Federal Reserve held interest rates steady for a fourth straight meeting as expected but more importantly signaled the possibility of a rate cut, but later in the year and pretty much ditched the prospect of a reduction in March, which some optimistic economists were banking on.
As a result, Stocks saw their biggest decline on a Federal Reserve day since last March after Jerome Powell said officials want to keep their options open instead of rushing to cut interest rates.
“If stock bulls expected a rate cut in March, Powell seems to have closed the door on that,” said Oscar Munoz at TD Securities.
As a result, and other significant news, the S&P 500 fell 1.61%, the most since September while the Dow fell 0.82% and the NASDAQ slid 2.23%.
Treasuries rose as fresh concerns about regional lenders added to economic worries after New York Community Bancorp’s surprise loss which dragged their shares down by 38% after it cut its dividend and posted a surprise loss. As a result, Regional U.S. bank stocks sank on Wednesday, renewing fears over the health of similar lenders.
Interest rates took the elevator going up — but are going to take the stairs coming down.
Now we turn to the Bank of England, which will hold rates again today, and markets are not expecting a possible cut until later in the year – higher for longer, again!
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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%.
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This is an edited version of a live discussion with Robbie Barwick from the Citizens party.
The Senate will be delivering their report on Regional Banking, and it will be important to ensure access to cash is protected in an era of CBDC. And we need to ensure the Government does not outsource its fiscal and monetary authority to the Reserve Bank. Behind these issues is the question of power, and tyranny. Who is setting the agenda, and who is in control?
Original stream with chat replay here: https://youtube.com/live/7Or8ais2WxI
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!
Wishing all our followers and supporters a happy 2024. We will be back with daily shows on finance and property, and we briefly touch on some of the items on our new year agenda.
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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.”
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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.
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In our final Friday afternoon chat, for the year Journalist Tarric Brooker and I look back at 2023, with all its ups and downs, and consider the year ahead, which Schrödinger’s cat like could go down quite different paths.
And we look at the most burning question: When Could Australian Interest Rates Be Cut?
Tarric’s slides and articles is here: https://avidcom.substack.com/p/the-most-burning-question-answered.
Thanks to all those who follow and subscribe, and please like and share the show. We will be back in 2024 for more charts and chat.
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A final 2023 chat with Robbie Barwick from the Australian Citizens Party. We look at the RBA’s latest outing on cash usage, the Senate review of the RBA’s independence bill, and the formation of a National Investment entity.
On 7 December 2023, the Senate referred the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 [Provisions] to the Senate Economics Legislation Committee for inquiry and report by 21 March 2024.
The critical issue is that the Treasurer is walking back Government’s power to intervene with RBA decisions if they do not agree. This power was put into the constitution years ago but has never been used.
Without it, the Technocrats will be able to take over, and follow the lead of the Bank For International settlements, to the potential disadvantage of ordinary Australians and businesses.
Make a submission to make the case for this power to be retained! The closing date for submissions to this inquiry is 2 February 2024.
