The last mile of the journey in getting inflation back into its box, is the hardest and most intractable. So while US inflation is much lower than it was the latest release yesterday, ahead of the FED rate decision today shows it’s not declining quickly and remains above the Federal Reserve’s targets.
In summary, core inflation matched market expectations in November, increasing at a marginally faster rate of 0.3%. In annualised trend terms, core inflation is running at 3¼%, with rapid core goods disinflation of 3¾% broadly offsetting faster core services inflation of 5½%. But core services excluding housing inflation has picked up to 6% in annualised trend terms, while the trimmed mean CPI – which gives a sense of the breadth of price rises – has picked back up to 3¾%.
The initial spike in 2021 was driven by goods prices, which had been stable for years. That was mainly thanks to the pandemic’s effect on supply chains. That shock is over. At this point, inflation is almost entirely about core services, which include shelter.
The FOMC won’t change rates this week, but it does get to revise the “dot plot” which shows its projected course of interest rates ahead. That would be a way to assure the market that rates are coming down swiftly, but for now the Fed could be reluctant to do anything that encourages more speculation.
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Digital Finance Analytics (DFA) Blog
Disappointing US Inflation Data Will Keep The Fed Hawkish...
As expected, the US central bank’s policy-setting Federal Open Market Committee kept rates on hold following their latest meeting – in a target range of 5.25%-5.5%, a 22-year high. The decision is unanimous 12-0.
The S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down chances of another hike over the coming months.
Officials made minimal changes to the statement. One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.
They continue to leave the door open to another hike by repeating prior language on “determining the extent of additional policy firming that may be appropriate”.
They said the economy expanded at “strong pace in third quarter,” compared with prior description of recent “solid pace”; though job gains “have moderated since earlier in the year but remain strong,” after previously saying that hiring had slowed in recent months.
And they flagged that tighter financial and credit conditions” will likely to weigh on economy, after previously mentioning only “tighter credit conditions”; language could be seen as suggesting that the recent jump in long-term Treasury yields reduces the impetus for Fed to raise rates again. “The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks.”
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As expected, the US central bank’s policy-setting Federal Open Market Committee kept rates on hold following their latest meeting – in a target range of 5.25%-5.5%, a 22-year high. The decision is unanimous 12-0.
The S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down chances of another hike over the coming months.
Officials made minimal changes to the statement. One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.
They continue to leave the door open to another hike by repeating prior language on “determining the extent of additional policy firming that may be appropriate”.
They said the economy expanded at “strong pace in third quarter,” compared with prior description of recent “solid pace”; though job gains “have moderated since earlier in the year but remain strong,” after previously saying that hiring had slowed in recent months.
And they flagged that tighter financial and credit conditions” will likely to weigh on economy, after previously mentioning only “tighter credit conditions”; language could be seen as suggesting that the recent jump in long-term Treasury yields reduces the impetus for Fed to raise rates again. “The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks.”
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Today’s post is brought to you by Ribbon Property Consultants.
With bond yields surging back to levels not seen since 2016 in recent months, there has been no shortage of comparisons between the current state of markets and that on the eve of the global financial crisis. In fact, the parallels drawn between conditions now and in 2007 appear pretty strong when you take a look.
Simultaneous falls in bonds and equities could hit parity trades. The sort of asset mismatches we saw in the collapse of Silicon Valley Bank could return. With mortgage rates in the US at 8 per cent, both sides (sell and buy) of the real estate market could completely freeze.
Pockets of the economy that have less transparency could be in trouble, such as private equity and particularly private credit provided by hedge funds, which has become increasingly important given the banks have backed away from commercial lending.
As in the GFC, “trust between banks could suddenly evaporate”, while a move up in the US dollar could sap global liquidity at the wrong time.
Perhaps ASX investors should think about the bigger picture. Despite all that’s happened in the past 15 years – the GFC and recovery, the pandemic and recovery – they don’t have a lot to show for it.
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Go to the Walk The World Universe at https://walktheworld.com.au/
With bond yields surging back to levels not seen since 2016 in recent months, there has been no shortage of comparisons between the current state of markets and that on the eve of the global financial crisis. In fact, the parallels drawn between conditions now and in 2007 appear pretty strong when you take a look.
Simultaneous falls in bonds and equities could hit parity trades. The sort of asset mismatches we saw in the collapse of Silicon Valley Bank could return. With mortgage rates in the US at 8 per cent, both sides (sell and buy) of the real estate market could completely freeze.
Pockets of the economy that have less transparency could be in trouble, such as private equity and particularly private credit provided by hedge funds, which has become increasingly important given the banks have backed away from commercial lending.
As in the GFC, “trust between banks could suddenly evaporate”, while a move up in the US dollar could sap global liquidity at the wrong time.
Perhaps ASX investors should think about the bigger picture. Despite all that’s happened in the past 15 years – the GFC and recovery, the pandemic and recovery – they don’t have a lot to show for it.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
As I have warned, October can be a fickle month on the markets, and is proving to be so again. Growing volatility in U.S. stocks is driving a search for defensive assets, though investors may have fewer places to hide this time around.
On Friday, global stock markets, including those in the US and Europe, experienced declines due to rising US treasury yields which reached a 16-year high and the potential escalation of the Israel-Hamas conflict. The pan-European STOXX 600 index lost 1.36% and MSCI’s gauge of stocks across the globe shed 1.10%. Emerging market stocks lost 0.53%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.6% lower, while Japan’s Nikkei lost 0.54%. So, losses everywhere.
On Friday, US President Biden said he plans to ask Congress for another $US74 billion ($117.2 billion) to fund the wars in Ukraine and the Middle East.
Fed Speak is not helping either, while other Fed officials have hinted that the tightening cycle could be at an end, Federal Reserve Chairman Jerome Powell’s comments on Thursday underscored possible further interest rate hikes, driven by the robust US economy, strong retails sales and tight labor market.
In a Bloomberg TV interview, Mohamed El-Erian took Federal Reserve policymakers to task, saying the US economy is seeing a period of “greater uncertainty” because of a lack of vision from Fed officials.
“You cannot drive a car without some understanding of what the road ahead looks like. You can’t just look at the rear-view mirror and try to adjust to every curve you just had,” El-Erian, the chief economic adviser at Allianz, said. “That is not how you drive policy and it’s certainly not how you drive policy when the impact of policy happens with a lag,” he said. “This is the first Fed I know that has not gotten it.”
In a note, a Bank of America’s team led by Michael Gapen said the Fed could done lifting rates. “Fed commentary has all but confirmed that the Fed will stay on hold in November. We shift the last rate hike in our forecast out to December. We think the strong September data keep another hike in play. But it is a close call. There are meaningful risks that the Fed will either delay the last hike into 2024 or not hike again.”
“Investor sentiment is quite negative, and we believe it’s important to zoom out and focus on the long term – even the intermediate term – and a lot of this will fall by the wayside,” said Ross Mayfield, investment strategy analyst at Baird.
“There’s not enough attention being paid to company earnings, which have been coming in strong, and guidance has been solid,” Mayfield added. “Investors would be wise to pay attention to that as much as the macro events, the geopolitical tensions.”
On Thursday the yield on 10-year U.S. Treasury notes, the bedrock of the global financial system, was briefly bid above the 5% barrier for the first time since July 2007, touching 5.001%. While the benchmark yield eased back from that level, it posted its largest weekly surge since April 2022. The 30-year bond last rose in price to yield 5.078%, from 5.102% late on Thursday. With the 2 year in similar territory, such a flat yield curve is a sign of uncertainty, with some questioning whether the bond market has become unanchored, or whether the big US bond issuance has moved markets, or whether it simply reflects a risk premium. The MOVE index, which measures expected volatility in U.S. Treasuries, stands near a four-month high.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
As I have warned, October can be a fickle month on the markets, and is proving to be so again. Growing volatility in U.S. stocks is driving a search for defensive assets, though investors may have fewer places to hide this time around.
On Friday, global stock markets, including those in the US and Europe, experienced declines due to rising US treasury yields which reached a 16-year high and the potential escalation of the Israel-Hamas conflict. The pan-European STOXX 600 index lost 1.36% and MSCI’s gauge of stocks across the globe shed 1.10%. Emerging market stocks lost 0.53%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.6% lower, while Japan’s Nikkei lost 0.54%. So, losses everywhere.
On Friday, US President Biden said he plans to ask Congress for another $US74 billion ($117.2 billion) to fund the wars in Ukraine and the Middle East.
Fed Speak is not helping either, while other Fed officials have hinted that the tightening cycle could be at an end, Federal Reserve Chairman Jerome Powell’s comments on Thursday underscored possible further interest rate hikes, driven by the robust US economy, strong retails sales and tight labor market.
In a Bloomberg TV interview, Mohamed El-Erian took Federal Reserve policymakers to task, saying the US economy is seeing a period of “greater uncertainty” because of a lack of vision from Fed officials.
“You cannot drive a car without some understanding of what the road ahead looks like. You can’t just look at the rear-view mirror and try to adjust to every curve you just had,” El-Erian, the chief economic adviser at Allianz, said. “That is not how you drive policy and it’s certainly not how you drive policy when the impact of policy happens with a lag,” he said. “This is the first Fed I know that has not gotten it.”
In a note, a Bank of America’s team led by Michael Gapen said the Fed could done lifting rates. “Fed commentary has all but confirmed that the Fed will stay on hold in November. We shift the last rate hike in our forecast out to December. We think the strong September data keep another hike in play. But it is a close call. There are meaningful risks that the Fed will either delay the last hike into 2024 or not hike again.”
“Investor sentiment is quite negative, and we believe it’s important to zoom out and focus on the long term – even the intermediate term – and a lot of this will fall by the wayside,” said Ross Mayfield, investment strategy analyst at Baird.
“There’s not enough attention being paid to company earnings, which have been coming in strong, and guidance has been solid,” Mayfield added. “Investors would be wise to pay attention to that as much as the macro events, the geopolitical tensions.”
On Thursday the yield on 10-year U.S. Treasury notes, the bedrock of the global financial system, was briefly bid above the 5% barrier for the first time since July 2007, touching 5.001%. While the benchmark yield eased back from that level, it posted its largest weekly surge since April 2022. The 30-year bond last rose in price to yield 5.078%, from 5.102% late on Thursday. With the 2 year in similar territory, such a flat yield curve is a sign of uncertainty, with some questioning whether the bond market has become unanchored, or whether the big US bond issuance has moved markets, or whether it simply reflects a risk premium. The MOVE index, which measures expected volatility in U.S. Treasuries, stands near a four-month high.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Wall Street’s main indexes closed lower on Thursday after a U.S. Treasury auction sent bond yields higher while investors were already digesting data that showed consumer prices rose more than anticipated in September.
After the data, the S&P 500 spent the morning zig-zagging between red and green. It turned decisively lower after a 1 p.m. EDT (1700 GMT) auction of 30-year U.S. Treasuries met weak demand.
US consumer prices advanced at a brisk pace for a second month, reinforcing the Federal Reserve’s intent to keep interest rates high and bring down inflation. Expectations ahead of Thursday’s publication of consumer price index numbers for September were for a continued clear reduction that would eliminate the last concerns that the Federal Reserve would be forced to raise interest rates once more. In the event, the market responded as though it had received a nasty shock, with bond yields surging higher while stocks sold off. An imminent Fed hike still looks unlikely — but evidently, many in the markets were hoping for any such chance to be extinguished.
The number was dominated by housing costs. Shelter inflation, on a year-on-year basis, is still above 7%. The clearest reason for disquietcomes from the “supercore” measure that Fed Chair Jerome Powell has emphasized in recent months — services excluding shelter. This category is heavily led by wage inflation, as labor is a large share of costs for such businesses.
Sentiment reversed after the 30-year Treasury auction, which drew weak demand and weighed heavily on the broader market sentiment. Swap contracts linked to future interest-rate decisions pushed the odds of another quarter-point hike back to about 50%, up from about 30% as recently as Wednesday.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
Digital Finance Analytics (DFA) Blog
More Evidence That Inflation Is Not Playing The Game
Wall Street’s main indexes closed lower on Thursday after a U.S. Treasury auction sent bond yields higher while investors were already digesting data that showed consumer prices rose more than anticipated in September.
After the data, the S&P 500 spent the morning zig-zagging between red and green. It turned decisively lower after a 1 p.m. EDT (1700 GMT) auction of 30-year U.S. Treasuries met weak demand.
US consumer prices advanced at a brisk pace for a second month, reinforcing the Federal Reserve’s intent to keep interest rates high and bring down inflation. Expectations ahead of Thursday’s publication of consumer price index numbers for September were for a continued clear reduction that would eliminate the last concerns that the Federal Reserve would be forced to raise interest rates once more. In the event, the market responded as though it had received a nasty shock, with bond yields surging higher while stocks sold off. An imminent Fed hike still looks unlikely — but evidently, many in the markets were hoping for any such chance to be extinguished.
The number was dominated by housing costs. Shelter inflation, on a year-on-year basis, is still above 7%. The clearest reason for disquietcomes from the “supercore” measure that Fed Chair Jerome Powell has emphasized in recent months — services excluding shelter. This category is heavily led by wage inflation, as labor is a large share of costs for such businesses.
Sentiment reversed after the 30-year Treasury auction, which drew weak demand and weighed heavily on the broader market sentiment. Swap contracts linked to future interest-rate decisions pushed the odds of another quarter-point hike back to about 50%, up from about 30% as recently as Wednesday.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
Wall Street’s main indexes were poised for a sharply lower open on Friday after a strong jobs report deepened fears that interest rates may stay elevated for an extended period.
The Labor Department’s report showed non-farm payrolls increased by 336,000 jobs in September on a monthly basis, against expectations of 170,000 additions, according to a Reuters poll of economists.
Unemployment rate stood at 3.8% against expectations of 3.7%, while average hourly earnings increased 0.2%, compared with estimates of 0.3%.
The S&P 500 eyed its fifth straight weekly fall, while the Dow is on track to decline for the third straight week.
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