Category: Financial Markets

Twists And Turns In The Bond Market

Now Boris Johnston has said he is not standing for British PM, the path may be open to Rishi Sunak, to bring some sense to British Politics. But this does not necessarily solve the broader financial pressures we are seeing, for example in the Bond Market, in the UK and elsewhere.

Indeed, the Bank of England has said they will start selling short term government gilts as part of its QT programme, having recently bought bonds further out down the yield curve. This reminded me of the famous Operation Twist, a name given to a type of monetary policy operation performed by Central Banks which involves buying and selling government bonds in an effort to provide monetary easing for the economy, although it’s not quite as aggressive as quantitative easing. The term “Operation Twist” was first used in 1961–in a reference to a Chubby Checker song and the dance craze it engendered–when the Fed employed a similar policy.

Now of course Central Banks are trying to move to QT rather than QE, as well as higher interest rates to tame inflation.

But could we see this Twist type of operation again, as the battle to fight inflation, now stubbornly intrenched is driving rates higher, risking higher unemployment and even a recession. Could we see a whole new front open up in Economic Policy, using Twist type operations again?

It is conceivable this could create capacity for Governments to spend more (again). But wait, there is more.

If you then added in a Central Bank Digital Current, the central planners could then direct spending – and interest rates more specifically at certain sectors of the economy. For example, they might offer “cheap” money for small business investment, but “expensive” money for vehicle purchases as a potential mechanism to bring supply and demand back into balance, and so help address the inflation problem. This might mean rates would not need to go so high. It also expands the role of the Central Bank, to the point where it merges back in the Government Treasury operations.

So, I would not be at all surprised to see these old twist techniques becoming new again as Central Planners around the world try to put years of poor policy back in the bottle – by trying to control yet more elements of the economy – which is a ways away from Free Market Capitalism – but a Central Planners dream.

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The RBA Has No Idea About Home Price Falls!

The RBA has lifted the cash rate by 2.5% and more rate hikes are expected in the months ahead as they try to head off inflation. The budget on Tuesday is expected to show inflation is expected to peak at around 8%, but stay above their target range of 2-3% right into 2024, with no real wages growth in the immediate outlook.

One factor which is being debated is the potential impact of home prices across the country, as we see higher cash rate costs translate into higher mortgage rates and lower borrowing power. The RBA recently showed a reduction of around 20% could be on the cards, though my analysis and conversations with prospective borrowers suggests that some are seeing their ability to borrow on the same set of income and expenditure parameters falling by as much as 30%.

And as I need to keep reminding you, availability of credit is the single most powerful influencer of home price moves. If you cut rates, and allow borrowers to leverage up with greater borrowing power, prices will rise, but on the other hand, if rates rise and borrowing power will fall.

Which then takes us to the question of what the direction of travel on home prices is expected to be.

Again those following my analysis will know we run three scenarios, a Best case, which assumes rates drop mid next year as inflation is conquered and wages rise – now largely discounted by the latest coming from Treasury around the budget, a Base case, which assumes higher rates through next year and beyond, inflation start above target into 2024, and no real wages growth, but no local recession, despite recessions appearing in Europe and possibly the US; and a worse case, where we get into recessionary territory here, causing rates to go higher initially, then fall back later as the RBA tries to dial back its over tight stance.

When I last ran my model, we suggested a base case fall in average house prices would fall by over 20% in the next couple of years, while Units, on average would fall by a little less because their run up in the past couple of years (driven by ultra-low rates and stimulus) was a little less. And I should say these are national averages, there are different outcomes across individual states and post codes, as well as property types. Check out our other shows for more granular information on this, or our Patreon programme to get the underlying data.

But our central view is a significant drop, which by the way will hardly be offset by higher migration, and additional Government incentive programes. Availability of credit is the main driver as I have explained.

Which takes us to the RBA. Now, on Friday there was a very interesting FOI release from the RBA. I will put the link in the comments below.

The request was for “documents from 1 May to 30 August 2022 about the impact of interest rate increases on the Australian property market (including any of: how far prices could fall under various scenarios; impacts on consumption and/or wealth effects; impact on construction employment and/or other related employment).”

https://www.rba.gov.au/information/foi/disclosure-log/pdf/222308.pdf

Lemmings Running From Ups To Downs And Back Again!

In this week’s market review we highlight once again the volatility in the markets. The fear gauge in the US is sitting at around 30, and still signals more uncertainty ahead. It is worth remembering that such massive swings are being harvested by the algo’s and big financial players who are able to trade on them, and which in turn help to exacerbate the moves. Such large swings are not a sign of a well-functioning market, more a sign of the how close to chaos we are. And as normal we will start with the US, look across Europe and Asia and end in Australia.

Equities have been under pressure this year as the central bank has embarked on an aggressive rate hike path as it attempts to reign in stubbornly high inflation, increasing worries of a policy error that will send the economy into a recession.

The latest edition of our finance and property news digest with a distinctively Australian flavour.

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The Wild Rides Continue…

Once again, volatility continues to surge, as the S&P 500 gave up gains on Thursday driven by rising Treasury yields despite the bulk of quarterly results suggesting corporate America is in better shape than feared. Recession fears are growing. More broadly the stresses and strains are showing across UK Politics, Oil, and Investment Banking, so we will touch on all these in today’s post.

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Inside The RBA’s Interest Rate Policy Sausage!

From the latest minutes we get a view of the deliberations which ultimately drove the RBA to 25 basis points a couple of weeks back. Not that we necessarily want to see the sausage being made. But there are some key points which signal no intent to pivot, and expectation of more rate hikes ahead, and the potential fall out in terms of employment and wages.

https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-10-04.html

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Breaking The Bond Market – The Crisis Is Real!

Bond Markets Are Suffering from Rising Volatility and Price Moves, as Central Banks lift rates and threaten Quantitative Tightening to try to tame raging inflation. And the word “crisis” is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government’s debt auctions is becoming a concern. Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step last Wednesday of expressing concern about a potential breakdown in trading, saying after a speech in Washington that her department is “worried about a loss of adequate liquidity” in the $23.7 trillion market for US government securities.

Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation.

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Your Super Savings Are Shrinking!

In this week’s market review we will as always begin in the US, cross to Europe and Asia, and end up with a local Australian summary – bearing in mind that our market pretty slavishly follows those in the Northern Hemisphere, which had an up day on Thursday, and a down day on Friday.

Volatility continues to rage across most asset classes, and this is now having real world consequences on our superannuation, or pension savings, which in Australia are forced by Government. As we will see the losses are mounting up.

But first, it was a bad end to a wild week with U.S. stocks dropped on Friday as worsening inflation expectations kept intact worries that the Federal Reserve’s aggressive rate hike path could trigger a recession, while investors digested the early stages of earnings season. The previous day the stronger than expected inflation data showed inflation remained stubbornly high and this shocked the market into a volatile rise. But in the last session of a volatile week, equities opened higher, then reversed course after data from the University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gasoline prices moved higher. The median expected year-ahead inflation rate rose to 5.1%, above the 4.7% seen in September. A climb in inflation expectations, a closely watched metric by the Federal Reserve, comes just a day after data showed worse-than-feared inflation pressure.

“Yesterday you had this amazing, powerful intraday rally that was completely wrong,” said Phil Orlando, chief equity market strategist at Federated Hermes. “Then you look at the Michigan numbers this morning that’s consistent with what we’re seeing in the economy, and the stock market now is down to reflect that number. That’s correct.”

The latest edition of our finance and property news digest with a distinctively Australian flavour.

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