Digital Finance Analytics (DFA) Blog – Page 5

More Records Broken, As Markets Swing Positive, For Now…

This is our weekly market update, a data-packed show where we start in the US, cross to Europe and Asia and end in Australia, covering crypto and commodities along the way.

The wild ride on the markets continued this week, with the S&P 500 and the Dow scoring record closing highs on Friday, thanks to big boosts from financial stocks after banks reported strong quarterly results despite the fact the latest inflation data fueled expectations for a smaller U.S. Federal Reserve rate cut in November. Traders kept bets steady for a roughly 88% probability the Fed would cut rates by 25 basis points at its November meeting, and a 12% chance it will leave rates unchanged. A slower pace of interest rate cuts potentially presents pressure on Wall Street, given that U.S. stock valuations scaled record highs on expectations of a sharp reduction in rates.

Major financial companies kicked off earnings season with upbeat comments from their top executives that should further ease investor worries that elevated borrowing costs were weighing on consumers and pushing the economy to the cusp of a downturn.

The US reporting season will gather momentum over the next three weeks amid general optimism. Still, concerns persist that stock prices have risen too fast, that the labour market is weakening fast and investors are on alert for geopolitical and US presidential election shocks.

European stock markets traded marginally higher on Friday, as investors digested lackluster British growth data.

China’s highly anticipated announcement of financial stimulus plans on Saturday was big on intent but low on the measurable details that investors need to ratify their recent return to the world’s second-biggest stock market. Saturday’s news conference by Finance Minister Lan Foan reiterated Beijing’s broad plans to revive the ailing economy, with promises made on significant increases to government debt and support for consumers and the property sector.

The Australian share market edged lower on Friday as traders awaited further signs of direction in the global economy after evidence of weakness once again reared its head in the US.

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The Noise In The CPI Data Machine!

When you are totally data dependant, as the FED is, noise in the incoming data is always going to be an issue, because signal and noise might not be aligned. There was a classic case yesterday as we got the latest read on the Consumer Price Index for the US from the Bureau of Labor Statistics.

Superficially at least, underlying US inflation rose more than forecast in September, representing a pause in the recent progress toward moderating price pressures, boosted by housing and food, which accounted for over 75% of the advance. Goods prices rose as well after reliably falling over the past year.

I have discussed before the disconnect between real lived experience of inflation and the official figures before, but if we break down inflation into its four main components, we find that it’s substantially all about services at this point. That’s been true for a while. Goods prices are deflating, but helped cause some of the disappointment because that’s happening less quickly than earlier in the year. In fact, food prices and air fares rose more than expected, even as shelter costs eased. That would make continued jumbo interest rate cuts difficult.

While the great spike in price rises that came the year after the pandemic has run its course, what remains is grinding down the services inflation that followed the rest, and that tends to be driven by wages.

So whether the CPI data is really signalling a slowing in reductions to inflation is questionable, but it does suggest the FED might be reluctant to go 50 basis points next meeting. And actually, the latest bond pricing suggests markets are also changing tack.

When all you have is data dependence, expect more volatility as the data or noise shifts around.

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Too Late! Kiwis Get Another Large Rate Cut, With More To Come…

Poor Kiwi’s have been hit by some of the highest interest rates in the western world, thanks to the aggressive OCR hikes from their Central Bank, as high migration stoked inflation, but still saw a recession. Then the RBNZ turns turtle and started to cut rates, as migration started to fall, along with home prices, and now they have another rate cut to contend with, as the economy remains weak, and international factors could push inflation higher again.

All up New Zealand’s economy has stalled, unemployment is rising and house prices are falling as the prolonged period of high borrowing costs curbs demand. Economists say inflation is now slowing rapidly, and some have warned it may undershoot the 2% midpoint of the RBNZ’s 1-3% target range. It’s a mess, and an object lesson in the impacts of long and variable lags.

This week, New Zealand’s central bank cut interest rates by half a percentage point, stepping up the pace of easing as policymakers become more concerned about the economic slowdown.

The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 4.75% from 5.25% Wednesday in Wellington. It is the RBNZ’s second straight reduction after it began its easing cycle with a quarter-point cut in August. The decision was a policy review, which is not accompanied by fresh economic forecasts or a press conference.

ASB’s inflation forecast suggests a risk that inflation undershoots the 2% midpoint of the 1% – 3% inflation target. The fallout of aggressive monetary policy will stay with Kiwi’s for a long time. And the road remains bumpy at best. No wonder the number of New Zealand citizens leaving is up significantly!

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Is The RBA About To Pivot On Interest Rates?

The RBA after the September monetary policy meeting suggested that the official cash rate would remain on hold for the foreseeable future, noting that the underlying inflation rate of 3.9% over the year to the June quarter “is still some way above the midpoint of the 2%–3% target range”.

The RBA has started to talk about scenarios, and this was reemphasised in the minutes of the meeting which was released Tuesday. As well as their current stance, the Minutes considered two scenarios that would justify financial conditions needing to be less restrictive than currently:

(i) if the economy proved to be significantly weaker than expected and this placed more downward pressure on underlying inflation than expected (due to higher household savings and/or if the labour market weakened more sharply than forecast); or

(ii) if inflation proved less persistent than assumed, even without weaker-than-expected activity.

So that begs the question, is the RBA about to pivot?

Well, CBA’s Gareth Aird who has been consistently forecasting rate cuts sooner for months now, than most of the other bank economists (I wonder why) suggests that We believe the introduction of these two scenarios that would justify less restrictive financial conditions provide an insight into the Board’s reaction function that could see the RBA commence an easing cycle this calendar year (in line with our base case).

Deputy Governor Andrew Hauser speaking at an event hosted by the Walkley Foundation said that despite the September minutes removing the line that “it was unlikely that the cash rate target would be reduced in the short term” the Bank had not change its tune arguing that its meeting minutes were not a particularly dovish message. The minutes also showed that board members discussed scenarios whereby interest rates risked remaining higher for longer or could be tightened further, conferring further pain on borrowers. It all boils back to the demand supply problem in the economy, where if demand remained stronger (perhaps thanks to tax cuts or government handouts – that’s my sidenote) or stronger than expected performance of the jobs market. In this case the cash rate might need to be noticeably higher than the market path underpinning the August forecasts.

So bottom line, the RBA minutes does not change the game on quick rate cuts, and we must continue to wrestle with higher for longer.

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Who’s Telling Porkies Now?

The unelected, neo-liberal biased International Monetary Fund, one among many technocrat groups which try to impose top-down advice based on their underlying philosophy, recently released their latest advice relating to Australia. Their concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country.

This time the IMF gave a mixed assessment of recent government budgets and whether Treasurer Jim Chalmers and his state counterparts were helping the RBA to tame Australia’s worst inflation outbreak in decades, because they warned the federal and state governments that any further unexpected rise in spending will force the Reserve Bank to keep interest rates high, and that future cost-of-living relief needs to be targeted.

We are certainly seeing some evidence of that in our household surveys, the findings of which I will discuss on Tuesday on my live show at 8pm Sydney time. Some are benefiting from the payments, despite having strong cash flow and savings, whereas for those under financial pressure, the rebates are hardly touching the sides, creating a more unequal story financially speaking. Indeed, One in four mortgage holders have had to skip paying for another expense to prioritise keeping a roof over their head, according to Finder.

This is an important point, because its Dr Chalmers and Finance Minister Katy Gallagher have hinted that they plan to announce another round of household subsidies before the next federal election, as Labor tries to placate voter anger over high inflation.

They also called for a complete overhaul of Australia’s tax system and suggested the government phase out $52 billion of superannuation tax concessions and the $19 billion capital gains tax discount to fund a reduction in personal income and company tax rates.

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

Walking The Uncertainty Tightrope Towards Who Knows What Next!

This is our weekly market update where we start in the US, cross to Europe and Asia and end in Australia, covering commodities and crypto on the way. To remind our loyal viewer, this is a data rich show, as I get the weeks developments into perspective.

Market trends are rarely linear for long, they naturally ebb and flow. Despite the flaring conflict in the middle east, and the US election just a month away now, MSCI’s global equities index rose on Friday, though for the week, it showed a roughly 0.7% decline, while the Dow closed at fresh record highs and the US dollar climbed to its highest level since mid-August as investors heaved a sigh of relief after a surprisingly strong U.S. labor market report.

Oil prices rose and settled with their biggest weekly gains in over a year on the mounting threat of a region-wide war in the Middle East, but gains were limited as U.S. President Joe Biden discouraged Israel from targeting Iranian oil facilities. Investors remained anxious about how Israel would respond after Iran fired missiles at it on Tuesday. Supreme Leader Ayatollah Ali Khamenei said earlier that Iran and its regional allies will not back down.

The Australian sharemarket snapped a three-week winning streak on Friday, as the escalating conflict in the Middle East sent traders fleeing equities and pulled shares down from record highs touched a week earlier. The S&P/ASX 200 ended Friday’s 0.7 per cent lower at 8150 points, dragging the score to a weekly loss of 0.8 per cent, its first since early September. Of the ASX’s 11 sectors, nine ended the session lower.

The IMF this week gave a mixed assessment of recent government budgets and whether Treasurer Jim Chalmers and his state counterparts were helping the RBA to tame Australia’s worst inflation outbreak in decades.

Finally, in crypto, Bitcoin (BTC) dropped over 5% this week as the escalating conflict in Gaza and Lebanon fuelled flows into safe-haven assets.

http://www.martinnorth.com/

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