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Fed Signals Higher For Longer And Markets Crater!

As Central Bank Rate Fest rolls on from the RBA on Tuesday, as expected the FED lifted the US interest rate target by 75 basis points overnight and reaffirmed continued hikes ahead. Later tonight we will get the Bank of England announcement, which is also expected to hike big.

The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. “Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”

As a result, U.S. stocks ended sharply lower on Wednesday, with the S&P 500 suffering its worst rout on a Fed decision day since January 2021, as comments from Fed Chair Jerome Powell shattered initial optimism over a Fed policy statement that raised interest rates by 75 basis points but signaled that smaller rate hikes may be on the horizon.

The FED said its battle against inflation will require borrowing costs to rise further, yet signaled it may be nearing an inflection point in what has become the swiftest tightening of U.S. monetary policy in 40 years.

“It’s as if investors came to a haunted house and got candy, but once they unwrapped it, saw it was soggy broccoli,” said Max Gokhman, chief investment officer at AlphaTrAI.

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/

The Inflation Battle Is Causing Casualties…

Today we look at what the RBA says about recession risks, examine the US Bond market ahead of the Federal Reserve decision on rates tomorrow, the start of Bank of England QT and its implications, and the latest data from New Zealand which underscores the expectation that even higher interest rates are to be expected. All up, inflation is created a wide range of casualties!

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Today’s post is brought to you by Ribbon Property Consultants.

The US Housing Market Is Cooling… [Podcast]

Latest US data shows housing starts is falling, as mortgage rates rise. One reason what the markets slide on Wednesday. Ahead, expectations of future earnings are down – just another reason to expect weaker markets, as bond yields continue to track higher.

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/

Digital Finance Analytics (DFA) Blog

The US Housing Market Is Cooling... [Podcast]

00:00 / 00:10:39

Forget The FED Pivot – And Housing Price Falls Won’t Stop Them Either! [Podcast]

So, after this latest rate hike, the Fed has now lifted its benchmark rate by 300 basis points, or 3% in just six months as the central bank accelerates policy to restrictive territory with the aim of slowing growth enough to make a meaningful dent in inflation.

“We can’t fail to do that,” he said, referring to the central bank’s mission against price growth. “That would be the thing that would be most painful for the people that we serve. We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t. What we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation. That’s what we’re doing. We haven’t given up the idea that we can have a relatively modest increase in unemployment.”

But critically, there were no signs of easing its push into restrictive territory as it battles to cool the embers of inflation.

“We’ve just moved into the very, very lowest level of what might be restrictive [territory],” Powell said in the press conference that followed the monetary policy statement. “In my view, there’s a ways to go.”

As a result, the Fed now sees its benchmark rate rising to 4.4% in 2022, above the 3.4% forecast in June, paving the way for further front-loading of rate hikes in the remaining two Fed meetings for the year and into 2023.

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Today’s post is brought to you by Ribbon Property Consultants.

Digital Finance Analytics (DFA) Blog

Forget The FED Pivot - And Housing Price Falls Won’t Stop Them Either! [Podcast]

00:00 / 00:17:50

Is Risk Hiding In Plain Sight?

Deep in the financial system plumbing, risks are rising. And the question is – will something break, as rates are hiked, and liquidity withdrawn? Massive Federal Reserve buying of Treasuries stabilized the market over the past two years, but liquidity gauges have eroded since the purchases stopped.

The market for U.S. Treasuries has grown to more than $24 trillion, expanding nearly tenfold over the past 20 years at the same time that major regulatory changes have blunted the ability of some bank-owned dealers of government debt to increase their purchases.

The Fed is this month accelerating the pace of winding down the nearly $US9 trillion balance sheet it built up for more than a decade in an effort to cushion the economy from shocks. It aims to shrink the total by $US95 billion a month — double the August pace.

Yet in fact the Federal Reserve Weekly Assets went up last week, which is weird, given the fact that Quantitative Tightening is meant to have started and we did see a fall in total assets less eliminations over recent weeks. But on the 14th of September the balance was reported at $8,832,759M, whereas the preceding week it was $8,822,401m, so a net rise of $10.36 billion.

Looking down the list of assets, we see US Treasury Securities fell by 3.73 billion, the bulk of which was bills, while mortgage-backed securities rose by $9.23 billion.

On the other hand, reverse repos rose by $66.8 billion (this is money parked at the Central Banks by Financial Institutions).

Right now, when bonds held by the Fed mature, the central bank churns the money back into the market. When it stops doing that, investment banks — known as dealers — must mop up any excess paper in the system on top of any new bonds that the US Treasury issues. It is not certain that the commercial sector has the stomach for this. Bank of America head of US rates strategy Mark Cabana said: “Dealers will inevitably be holding more Treasury inventory.

They’re going to have to finance that, which puts upward pressure on repo rates, that over time will probably contribute to more volatile Treasury markets, potentially worsening Treasury liquidity.” This is all looking a bit messy and a signal there are liquidity pressures emerging. In fact, the US Federal Reserve’s more rapid exit from crisis-era policies is placing the $US24 trillion US government bond market under extra strain, heightening concerns about the bedrock of the global financial system.

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Here Comes The Wealth Destruction… [Podcast]

As foreshadowed, we are now seeing the sharp reversal in asset prices, which were driven through the roof due to ultra-low interest rates, central bank quantitative easing, and government support through COVID plus huge debt growth.

Of course, the recent gains were largely spurious, and a correction was always going to come – hopefully some watching our shows are best prepared for this process (which will take some time), but be clear wealth will be destroyed across property, shares, bonds, metals and crypto.

No surprise then that U.S. stocks ended sharply lower on Friday, tumbling to two-month lows as a warning of impending global slowdown from FedEx hastened investors’ flight to safety at the conclusion of a tumultuous week. The session also marked the monthly options expiry, which occurs on the third Friday of every month. Options-hedging activity has amplified market moves this year, contributing to heightened volatility.

All three major U.S. stock indexes slid to levels not touched since mid-July, with the S&P 500 closing below 3,900, a closely watched support level and suffering its worst weekly percentage plunge since June.

“It’s been a tough week. It feels Halloween came early” said David Carter, managing director at JPMorgan in New York. “We are facing in this toxic brew of high inflation, high interest rates and low growth, which isn’t good for stock or bond markets.”

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

Digital Finance Analytics (DFA) Blog

Here Comes The Wealth Destruction... [Podcast]

00:00 / 00:22:33

Here Comes The Wealth Destruction…

The session also marked the monthly options expiry, which occurs on the third Friday of every month. Options-hedging activity has amplified market moves this year, contributing to heightened volatility.

All three major U.S. stock indexes slid to levels not touched since mid-July, with the S&P 500 closing below 3,900, a closely watched support level and suffereing its worst weekly percentage plunge since June.

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

The Monetary Arms Race Is Here!

The RBA was interrogated by Parliament today regarding its monetary policy stance and interest rates. But it was all a bit pointless as really the Federal Reserve sets interest rates in the US, but effectively also for the entire world, given the fact that the US dollar behaves as the reserve currency.

Persistently high inflation in the United States and elsewhere has forced the Federal Reserve to aggressively raise interest rates, giving the dollar a significant yield advantage that has triggered a rampaging rally against its major global peers. That will put pressure on the RBA.

Eventually, the Fed’s actions will come back to bite it and the US. By then all the many trillions of dollars of stimulus work done during the pandemic will have been unwound. What a phenomenal waste of time, money and effort.

The fallout on the FED’s myopia will be felt more in other countries, including Australia, which means we are on the end of the see-saw driven by the US. This is soft power at its worse, transmitted to a monetary system which is built to favour one nation over the rest.

The question is of course whether this will change. Without major reform it will not, not least in recognition of fact that many international institutions such as the IMF, WEF and BIS are strongly aligned to the interests of the US. So The Monetary Arms Race Is Here.

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

The Monetary Arms Race Is Here!

00:00 / 00:20:48

Emerging Pressures On Mortgage Lenders…

The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago, according to a recent Bloomberg report.

There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates.

More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat. “The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.”

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