Brazil central bank holds rates at 2.00%, says believes inflation is temporary

Comments from Brazil’s central bank

  • Reaffirms forward guidance that it doesn’t intent to reduce monetary stimulus as long as specified conditions met
  • Latest readings in inflation were above expectations
  • Despite the expected cooling in food prices, inflation is still expected to be high
  • Inflation expectations and baseline forecasts remain below target for relevant policy horizon
  • Continues to monitor inflation developments carefully, in particular, underlying inflation
  • Soon the conditions for maintaining forward guidance may not be satisfied
  • Forward guidance removal doesn’t mean rate hike
The drop in BRL this year has certainly been inflationary and that’s unwinding now. At the same time, you can see the growing concerns about inflation.

Like a general fighting the last war

Central banks doing now what they should have been doing a decade ago

The last half of the 2010s was characterized by central banks trying to get back to ‘normal’ or to ‘home’ on interest rates. They were obsessed with getting away from the zero bound, just so they could cut again in the future.
They were slaves to the Phillips Curve and few of them emphasized (or realized) that technology, globalization and deunionization were putting downward pressure on prices.
Now we arrive in the 2020s and they’ve seen the light. They’re pledging to keep rates low and goose inflation above target. Kaplan today highlighted technology-enabled disruption as justification.
The problem is that the game is likely to change again. It’s all like a general investing in trench-digging equipment after the first world war. China is now exporting inflation.
I believe that the layering on of leverage should be one of the big takeaways from the market blowup in March. Central banks should be tackling that but instead, they’re building an even-larger tower of leverage in the belief that if anything goes wrong, they can always pump in enough money to make it better. That’s a mistake.
The real danger though is inflation. Yields moved up yesterday and in Asia today before correcting back lower. If they start to move up, bond investors are going to be sitting on massive paper losses.
Already, parts of the market are signaling that inflation is coming.Note that 5y5y forward inflation rates today are at 2.13%; a level that would crush today’s 10-year note bond buyers at 0.73%.
That’s a long way from even the post-crisis era but you can see which direction it’s moving.
I’m the furthest thing from an evangelical on inflation but you can see the way that house prices, commodity prices and government spending are going.

Since March 2020 the M2 money supply is UP 18.61% which represents the fastest jump in HISTORY.

GOLD is up 8% in 1 MONTH SILVER is up 27.5% in 1 MONTH PALLADIUM is up 18.2% in 1 MONTH PLATINUM is up 15.9% in 1 MONTH RHODIUM is up 15.9% in 1 MONTH No inflation?Image

BOJ’s Kuroda: Economic activity has gradually resumed

BOJ governor, Haruhiko Kuroda, begins his press conference

  • But Japanese economy remains in an extremely severe siituation
  • Pace of recovery to only be moderate
  • Inflation is likely to be negative for the time being
  • Future economic developments remain extremely unclear
  • Risks are tilted to the downside for prices, economic growth
  • BOJ won’t hesitate to ease further if needed
  • Will continue to support corporate financing, markets
Kuroda is still maintaining a more subdued take on the economic situation but that is hardly a surprise. The recent economic data from Japan have been rather poor and a possible virus resurgence only adds to more risks surrounding the outlook.
But Kuroda stands firm in assuring that the BOJ policies since March are having an impact, though I’m sure they pretty much lucked out on this one with the Fed and ECB doing most of the heavy lifting to appease financial risks in the market for the most part.

FOMC central tendencies and dot plot for projected rates. Fed projects rates to remain at current levels through 2022.

Central tendencies and dot plot for June 2020

The last time the central tendencies and dot plot was released was way back in December 2019.  At that time, the world was different place.

At the time in December, the Central tendencies saw 2020 numbers at:
  • GDP 2.2%
  • unemployment rate 3.5%
  • PCE inflation 1.9%
The 2021 projections saw:
  • GDP 1.9%
  • unemployment 3.6%
  • PCE inflation 2.0%
The projection for the Fed funds rate at the end of 2020 was 1.6%.  For 2021 the rate rose to at 1.9% with the 2022 rate at 2.1%.
The current median estimate for central tendencies shows 2020 numbers at:
  • GDP -6.5%
  • unemployment 9.3%
  • PCE inflation 0.8%
The projections for the Fed funds rate at the end of 2020 comes in at 0.1%. For 2021 the rate targets 0.1% with the 2022 rate targeted also at 0.1%.
Below is the chart of central tendencies from the Federal Reserve
Central tendencies
Below is the dot plot with all participants keeping the rate at 0.1%.  In 2022, there are two voting members to forecast day higher rate.  The market was looking for the Fed to keep rates low through 2022
Dot plot

Japan GDP for Q1, preliminary: GDP -0.9% sa q/q (vs. expected -1.1%)

Japanese economic growth in the January to March quarter of 2020 – this the preliminary release

GDP -0.9% sa q/q
  • expected -1.1%, prior -1.8%

GDP -3.4% annualised sa q/q

  • expected -4.5%, prior -7.1%
GDP -0.8% nominal q/q
  • expected -1.3%, prior -1.5%

GDP deflator (an inflation indication) %

  • expected 0.7%, prior 1.2%

Private consumption -0.7%

  • expected -1.6% q/q, prior -2.8%

Business spending -0.5% (capex)

  • expected -1.5%, prior -4.6%
  • 2 consecutive quarters of contraction for the Japanese economy, the economy moves into recession for the first time since H2 of 2015
  • Q1 exports had their biggest drop q/q since the 2nd quarter of 2011, down 6%
January and February were stable to slowly picking up for Japan but the outbreak in  March hit economic growth. The April to June quarter is likely to be even worse, with a more prolonged impact. Restrictions were imposed by the April 7 national emergency declaration shutting many restaurants, large retail outlets, hotels and more. The restrictions were partially lifted on May 14, but are still in place for Tokyo and Osaka, the two largest cities in Japan.
Yen doing little.

Paul Tudor Jones is one of the great macro traders of all time but he’s ‘a slave to the tape’

How does Paul Tudor Jones see the world now?

Paul Tudor Jones is one of the great investors of all time and he’s renowned for macro calls. His latest market outlook highlights the coming waves of direct debt monetization that will reshape the economies and financial markets of the world.
“There will be many assets that will move as a result of this money creation. So what is an investor to do? Traditional hedges like gold have done well, and we expect investors to continue to seek refuge in this safe asset. One thing I have learned over time is the best thing to do is let market price action guide your decision-making and then try to understand the fundamentals as they become more evident and comprehensible,” he writes in a note with Lorenzo Giorgianni.
That’s an odd thing for one of the great macro traders of all time to say, but if you look back over his (rare) public comments, it’s a familiar theme. Here’s what he said back in 2009:

Continue reading »

Fitch has affirmed Japan’s rating at A with outlook stable

Fitch rating agency of Japan – affirms ‘A’ & outlook stable

  • expects Japan’s broad policy continuity in coming year
  • says in addition to low interest rates, positive nominal GDP growth has kept trajectory of Japan’s public debt in check
  • inflation to remain murted in 2020 after pikcing up slightly in DCec 2019
  • does not expect change in the BOJ’s policy settings

Fed Powell press conference highlights

Feds Powell conducts press conference after January 2020 interest rate decision

Fed's Powell
  • Fed wants to avoid misinterpretation with inflation wording
  • Not comfortable with inflation persistently under 2%
  • Want to signal not comfortable with prices below goal
  • We expect Bill purchases to make reserves ample in 2nd quarter
  • Fed will know when adjustments have run course when reserves are durably at a sustainable level
  • At some point the Fed will raise minimum bid rate on repos
  • reserve levels will have to be at a level high enough to remain ample. 1.5 trillion will be the bottom end of the range
  • he expects reserve fluctuation particularly around tax season
  • Fed will provide more details and will keep the process a smooth one
  • Fed’s attention is just to raise the level of reserves. That is our sole intention
  • Asked if Bill buying is QE , he says many things affect financial markets.
  • Most forecasts underestimated labor participation gains
  • Labor market continues to perform well
  • Labor wages have moved from about 2% to 3% currently
  • It is a bit surprising that wages haven’t risen more given such low unemployment

Market reaction:

  • Gold has moved to new session highs at $1575.84
  • US rates have moved lower with the 10 year falling to 1.5942%
  • NASDAQ index up 47 points at 9316.69. S&P index up 11.3 points (was up 13 points)
  • EURUSUD moved to New York session highs at 1.1015.  A trendline on the hourly chart is just ahead at 1.1017 and the falling 100 hour moving average is 1.10232
EURUSD looks to test topside trend line and falling 100 hour moving average

  • USDCHF is moving toward session lows.  Markets trading at 0.9728 from 0.9743. USDJPY moves lower as well (109.10 currently from 109.20).
More from Powell presser:
  • virus is a serious issue, significant human suffering
  • coronavirus likely to disrupt activity in China, maybe world
  • very uncertain about how far virus will spread
  • Fed’s carefully monitoring situation around coronavirus
  • sees grounds for cautious optimism on global economy
  • supportive financial conditions, trade tensions easing and lower odds of hard Brexit all contributed to more positive outlook
  • We will continue to adjust IOER as appropriate to help move the effective rate for the middle of the range
  • there is no current urgency to make decision on standing repo facility
  • over the long term it is possible there is a financial stability risk from climate change
  • in the very early stages of the impact from climate change
On China and USMCA
  • Phase 1 deal with China and USMCA is without question positive and should support the economy over time
  • Trade policies uncertainty remains elevated
  • Still have 2 or 3 active trade discussions going on at the moment
  • There is a wait and see attitude for businesses on trade
  • We need to be patient on trade deals economic impact
  • Does not yet see a decisive recovery for manufacturing
There is some modest moves to the downside in stocks and the USD has tilted to the downside (3:04 PM ET):
  • S&P index up 6.5 points
  • NASDAQ index up 32 points
  • The USD has ticked lower through the presser on a modest basis.
More from the Powell press conference:
  • We don’t think there is imminent risk on Chinese debt
  • Fed sees asset value valuations somewhat elevated, but not extreme
  • household that is in a good place
  • business debt is rising but not threatening stability
  • vulnerabilities to financial stability is moderate overall
Press conference ends at 3:23 PM ET.

Former Fed chairman Paul Volcker dies at 92

The man who conquered inflation dies

The man who conquered inflation dies
Paul Volcker has died of cancer at 92, the New York Times reports.
Volcker led the Fed from 1979-1987 in a particularly difficult time characterized by runaway inflation and currency instability. He began working at the Treasury Department under JFK and was chairman of Obama’s Economic Recovery Advisory Board.
Late in his life he was known for the ‘Volcker rule’; a measure that prohibited banks from making risky trades with their own funds, something that contributed to the financial crisis and bank bailout of 2008.
However his defining legacy was tackling the persistent and runaway inflation of the 1970s and 1980s by raising interest rates as high as 20.0% in 1980. That triggered a recession the next year but ended the era of double digit inflation and kicked off the great moderation — a +30 year period of generally falling borrowing costs and interest rates.