Archives of “inflation” tag

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The 10 year yield trades above 100 day MA for first time since June 16

  
  Analysis
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Price cracks above the recent ceiling near 1.385%

The 10 yield yield has moved to the highest level since July 14 and in the process has moved above recent ceiling near 1.385%. The price is also above the 38.2% retracement of the move down from the March 30 high at 1.375% and finally in the 100 day moving average 1.405%. The current yield is trading at 1.415%.
US 10 year yield
The next target will be at the 50% midpoint of the move down from the March 30 high at 1.452% get above that and there is more room to roam with 1.53% as another target area.
Despite higher inflation, and expectations of taper, the 10 year yield is still well below the high for the year at 1.774%. Overseas demand has been very strong especially in the longer end as concerns about Covid and higher rates in the US have investors parking funds in the liquid US debt instruments. With the Fed now targeting inflation over 2% in 2022 and 2023, the real return at 1.415% is negative. Nevertheless, it beats parking funds in France at near 0.07%.

Brazil’s central bank 1% rate hike, as expected

  
  Analysis
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Banco Central do Brasil​ hikes its benchmark interest rate to 6.25% from 5.25%.

Headlines via Reuters from the statement (bolding mine):

 

  • decision was unanimous
  • sees rate hike of the same magnitude at next meeting
  • in the current phase of rate hike cycle, this pace of adjustments is best to guarantee the anchoring of inflation expectations
  • sees robust economic recovery in the second half of year
  • baseline scenario and balance of risks indicate that an interest rate hike cycle should advance into contractionary territory
  • elevated fiscal risk creates an upward asymmetry in the balance of inflation risks
  •  the current pace of rate hikes will allow the committee to obtain more information regarding the state of the economy and the persistence of shocks
  • price increases for industrial goods have not subsided and should remain a pressure in the short run.
  •  new round of market discussion regarding inflationary risks in advanced economies could result in a challenging environment for emerging economies

Fed’s Barkin says the dot plot is not FOMC policy

  
  Analysis
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Barkin is the president and CEO of the Federal Reserve Bank of Richmond, he has some comments crossing on the wires.

Speaking in a Bloomberg TV interview.

 

  • you want yields to respond to what happening in the economy
  • yields reflecting good news on vaccines, fiscal aid
  • really hopeful that we’re at the back end of pandemic
  • the Fed’s interest-rate dot plot is not Federal Open Market Committee policy
  • Fed has tools to handle unwanted inflation
  • inflation is not a one-year phenomenon, it’s multi-year
  • expect to see price pressures in 2021
  • expect strong demand, met by some supply-chain issues
  • the US economy will have strong spring and summer
Re that headline I put in the, headline …. the dot plot is part of the Fed’s forward guidance. Barkin’s comments are in line with other comments from Fed officials, they are toeing the party line since Chair Powell laid down the law and told them all to shut up about tapering a month or so back.

 

Barkin is the president and CEO of the Federal Reserve Bank of Richmond, he has some comments crossing on the wires. 

Dow and S&P close at record levels. NASDAQ erased its earlier declines

  
Analysis, US Market
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Major indices off highs as well

The Dow and S&P indices both closed at record highs after Fed Chair Powell and Fed continue to steer the soft policy course with not a lot of concern for inflation and expectations for stronger growth.

The final numbers are showing:
  • S&P index up 11.41 points or 0.29% at 3974.12. The high reached 3983.87. The low extended to 3935.74.
  • Nasdaq up 53.63 points or 0.4% at 13525.20. The high reached 13595. The low extended to 13272.69
  • Dow rose 189.42 points or 0.58% at 33015.37.  The high reached 33047.58. The low extended to 32782.18
some big gainers today included:
  • Alcoa, +7.72%
  • Celsius, +6.37%
  • Crowdstrike holdings, +6.18%
  • Transmedic, +5.91%
  • Draft Kings, +5.21%
  • General Motors, +5.15%
  • United Airlines, +4.43%
  • Roku, +4.31%
  • AMC, +3.92%
  • Micron, +3.72%
  • Tesla, +3.71%
  • Marriott, +3.56%
  • General Electric, +3.5%
  • Rackspace, +3.5%
  • Boeing, +3.26%
  • Caterpillar, +3.16%
  • American Airlines, +2.82%

big losers today included:

  • Uber, -4.25%
  • First Solar, -2.81%
  • Black Knight, -2.06%
  • Rocket, -2.0%
  • Under Armour, -1.71%
  • Palantir, -1.56%
  • FireEye, -1.49%
  • Rite Aid, -1.46%
  • CVS, -1.35%
  • Dollar Tree, -1.27%
  • Walgreens, -1.08%
  • target, -1.03%
  • Chewy, -1.0%
  • Mastercard, -1.0%
  • Intuit, -0.94%
  • Stryker, -0.93%
  • Snowflake, -0.78%
  • HomeDepot, -0.77%

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

  
  Analysis
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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

  
  Analysis
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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.
Poweell
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.

BOJ’s Kuroda: Economic activity has gradually resumed

  
Analysis, Economy
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BOJ governor, Haruhiko Kuroda, begins his press conference

Kuroda
  • 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.

  
Analysis, Economy
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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%)

  
Analysis, Economy
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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%
More:
  • 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.
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