Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
Our latest Friday afternoon chat, picking over the latest charts, which are telling a confusing story, as Central Banks continue to hike into a head wind. How will this play out?
You can get Tarric’s charts here: https://avidcom.substack.com/p/charts-that-matter-2nd-september and follow him on Twitter @Avidcommentator
Go to the Walk The World Universe at https://walktheworld.com.au/
Economists, by nature or nurture, are like living and breathing versions of the Picasso paintings that show both sides of a solitary image. So well-known is their use of the phrase “on one hand … but on the other hand,” that President Harry Truman once famously asked for a one-armed economist to provide him with economic counsel.
With that caveat, New Zealand is I think a Petrie dish for how tight monetary policy plays out. The Reserve Bank of New Zealand started lifting rates earlier than other central banks last year and are set on more rises ahead.
Now according to a Reuters poll, New Zealand’s house prices are forecast to fall 10% this year and 5% next as aggressive interest rate hikes take some heat out of a blazing housing market, but not enough to solve the ongoing affordability crisis. And while the Reserve Bank in New Zealand does need to take home price movements into consideration when making interest rate calls, it seems to me that the objective of snuffing out inflation is number one, two and three, and to that end, if higher unemployment, or lower home prices are a necessary consequence then so be it.
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The markets are now sliding into September – always a weak month, and seasoned investors like Jeremy Grantham are calling it, more slides ahead. When you look at what the FED has said, it is highly likely – that is until (if) they change track (again). Until then, there is simply nowhere to hide. Note, they have provided no explanation of why they got past calls so wrong, so why should we believe them this time?
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More market weakness, as the penny drops that rates are going higher and recession risk looms. Despite some still hanging on to the belief of a Fed pivot, it seems the smart money has changed tack. This despite higher oil prices. Next couple of months will be “interesting”, as we see if the Central Bankers turn their words into actions. We will see.
How will global investors react to the overriding message from the Central Bankers Lovin-in at Jackson Hole? Aussie markets were 2% down on Monday morning.
Federal Reserve Chair Jerome Powell’s stern message was that interest rates are going higher for longer in a painful fight against inflation. Be clear, he quashed thoughts that the trajectory of monetary tightening could soon be tempered.
Investors now see the Fed’s policy rate peaking in March at around 3.80% and pared bets on a decline in 2023. The US yield curve between the five and 30-year maturities inverted for the second time this month, while the gap between the higher two-year yield and the 10-year rate widened.
The inversions suggest the bond market anticipates a recession is the necessary sacrifice to get price pressures back under control. Though I note already, some bank economists are saying, this is all talk, because the bond market hardly reacted.
Expect to hear more on the trade-off between higher rates of inflation and higher unemployment, and whether the 2-3% targeting which has become a cornerstone of Central Bank doctrine is relevant. Meantime, other than commodities, and the USD, there is nowhere to hide – and Bitcoin came down in sympathy.
Go to the Walk The World Universe at https://walktheworld.com.au/
Remember when the mantra from Central bankers was inflation was temporary? This was still being recited late last year, despite the rapidly expanding money supply created by the reaction to COVID (which had already been expanded by the reaction to the GFC in 2007 and beyond.
Ultra-low interest rates were coupled with excessive Government fiscal support from direct payments to businesses and households, and indirect support to businesses. This combined stoked home prices, and credit growth, in an attempt to maximise employment and sheeted inflation mainly to supply chain disruptions which would sort themselves out. RBA Governor Lowe late last year said no rate rise until 2024, and only recently changed his tune.
But fast forward just 6 months, and the tone has been changed completely, with a bevy of the world’s top central bankers delivering a stern and unified message on the need to curb inflation, declaring at Jackson Hole that it is broad based, here to stay and will require their forceful action. Like lemmings, they are now all running to the “must kill off rampant inflation at all costs” exit instead.
Begs the question, were they wrong then, or are they wrong now? And whilst they plan to lift rates significantly higher, will it actually tame inflation or not? And what collateral damage will these rate increases cause? I for one have little confidence in the whole Central Planners and Bankers edifice. They are of course unaccountable, and unelected.
In today’s market review we are going to focus on Fed Chair Jerome Powell speech at Jackson Hole, just 9 minutes in length but enough to move the markets down significantly.
For the Fed’s monetary policies to have any effect, markets must transmit them via the financial conditions to the actual economy. And the Fed needs to make sure this happens. And today was an effort by Powell to get this job done.
Speech: https://youtu.be/vhMRynjm3CI
The speech was one of the strongest ever by the Fed chief, reflecting the onerous burden borne by the central bank in curbing inflation retreating ever so slowly from four-decade highs.
First Powell said inflation needed to be controlled. That was their main mandate.
Next he signalled there will be more rate hikes in the months ahead, taking the cash rate well above the neutral rate – meaning that they intend to deliberately slow the economy.
And he acknowledged this will hurt households and businesses.
And acknowledge that the current labour market was out of wack.
So, this message cut directly across the ranks of those saying the FED will pivot – arguing the FED has really been signalling that it would soon “pause” the rate hikes or “pivot” to rate cuts, even though the Fed had raised its policy rates four times this year, including twice by 75 basis points, the biggest rate hikes in years.
Go to the Walk The World Universe at https://walktheworld.com.au/
In today’s market review we are going to focus on Fed Chair Jerome Powell speech at Jackson Hole, just 9 minutes in length but enough to move the markets down significantly.
For the Fed’s monetary policies to have any effect, markets must transmit them via the financial conditions to the actual economy. And the Fed needs to make sure this happens. And today was an effort by Powell to get this job done.
Speech: https://youtu.be/vhMRynjm3CI
The speech was one of the strongest ever by the Fed chief, reflecting the onerous burden borne by the central bank in curbing inflation retreating ever so slowly from four-decade highs.
First Powell said inflation needed to be controlled. That was their main mandate.
Next he signalled there will be more rate hikes in the months ahead, taking the cash rate well above the neutral rate – meaning that they intend to deliberately slow the economy.
And he acknowledged this will hurt households and businesses.
And acknowledge that the current labour market was out of wack.
So, this message cut directly across the ranks of those saying the FED will pivot – arguing the FED has really been signalling that it would soon “pause” the rate hikes or “pivot” to rate cuts, even though the Fed had raised its policy rates four times this year, including twice by 75 basis points, the biggest rate hikes in years.
Go to the Walk The World Universe at https://walktheworld.com.au/
Is the US in recession or not? Well the “official figures” are unsure, and despite the inverted yield curve (2-10) you can still argue there is no recession, which gives latitude to the Fed to hike further and faster.
We may hear something about this at Jackson Hole, the Central Bankers’ love-in!
Go to the Walk The World Universe at https://walktheworld.com.au/
Is the US in recession or not? Well the “official figures” are unsure, and despite the inverted yield curve (2-10) you can still argue there is no recession, which gives latitude to the Fed to hike further and faster. We may hear something about this at Jackson Hole, the Central Bankers’ love-in!
Go to the Walk The World Universe at https://walktheworld.com.au/
