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

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

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Pelosi says offered to reduce aid package by $1 trillion and was rejected by White House

Pencil that in

That’s an important detail because it means that $2.4 trillion is now the upper limit of what’s possibly coming. Every dollar lower is negative for the economy and risk trades and a potential positive for the dollar.
Previously, the indications were that Pelosi was holding firm around $3.4 trillion.
The meeting that was going to be at the top of the hour has been pushed back to 1:30 pm ET.
Along the same lines, according to The Hill, Chuck Schumer said Mnuchin and Meadows balked at Democratic proposal to set relief package at $2 trillion.
“You should have seen the vehemence: No!”
“You should have seen their faces: ‘Absolutely not!'”

Non-farm payrolls preview: Half the expected jobs gain in July are because of a quirk in seasonal adjustments

Teaching jobs are a big quirk

The consensus for Friday’s non-farm payrolls report is for 1.5 million jobs gains in the month but that doesn’t tell the real story.
The ADP report this week got some attention because it showed private hiring at just 167,000 jobs. Normally, you would expect that to take a big bite out of expectations, but it hasn’t.
Why? A big reason is seasonal adjustments in the data.
Normally, one of the easiest and clearest seasonal adjustments is teachers. They’re laid off at the same time every year and hired at the same time every year. So you discount the lay offs in June/July and the hires in Aug/Sept. It all washes out.
This year though, teachers were laid off early — in April, May and June.
In the BLS model, most of those layoffs are supposed to happen in July. So what happens is they add nearly 1 million jobs to the total before they even start counting. The thing is, those layoffs haven’t happened this year.
Because of that effect, job losses were overestimated in April/May and now will be added back in July. They estimate the effect at +850K jobs.
Still, that number could be fluid and the assumptions and adjustments the BLS makes will be critical in how it turns out. The risk is that it shows a skewed picture.
Given that, the better spot to watch may be the unemployment rate, which is taken from the household survey. This has its own problems because many people laid off because of COVID-19 have been misclassified — a problem the BLS has been struggling to correct. The consensus there is an improvement to 11.2% from 12.3%. Private payrolls (consensus +1398K) could also offer a clearer look at the economy excluding teacher effects.
As for trading it, watch out for people pointing to the seasonal adjustment effect after the fact. But note that it should already be priced in.

USA credit rating outlook revised to negative from stable by Fitch

Bold move by the rating agency

USA downgrade Fitch
The rating was affirmed at AAA but lowered to negative from stable. That’s how you get yourself a lawsuit.
  • Cites ongoing deterioration in public finances
  • Sees general debt to GDP above 130% by 2021
  • Expects deficit to narrow to 11% of GDP in 2021
  • Expects US economy to contract 5.6% this year
  • Statement
What Fitch had to say:
The Outlook has been revised to Negative to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan, issues that were highlighted in the agency’s last rating review on March 26, 2020. High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus. They have started to erode the traditional credit strengths of the US.
They’re not wrong.
Another risk they cite is the possibility of policy gridlock after the election because neither party will get a 60-seat Senate majority.

UK think tank says unemployment will reach 10% this year

UK think tank, NIESR, comments on the UK economy

  • Sees unemployment rate hitting almost 10% this year due to “premature” end to the government’s furlough program
  • Says government is making a mistake by cutting furlough program in October
  • Says that increases the risks of economic scarring
  • Forecasts UK economy to shrink by 10.1% in 2020, before growing by 6.1% in 2021

That is one take on the whole situation but if the health crisis gets worse in the coming months, who is to say that the UK government would not use that as an excuse to keep the furlough program running until the year-end.

For now, a lot about UK economic data – especially in relation to the labour market – is largely masked by the fact that the government’s furlough program is in place.
We will only get a better idea of how the economy is standing on its own two feet once the program expires. Things may be looking “good” for now but should there be substantial layoffs to come, it could lead to a bigger hit to the economy down the road.

Learn to be wrong and Who cares?

1.) Learn to be wrong. Traditional education trains us into thinking that we have to be right to get the grade. With investing and trading, focusing on being right will bring assymetric risk to your methodology and will eventually lead to a blowout at least once. – Steven Place

2.) First, invest in yourself.  That is, acquire as much knowledge as possible and analytical skills in a wide variety of disciplines and develop the ability to abstract yourself from the present. Become a mathematician, economist, political scientist, psychologist, sociologist, and futurist. – Gary Evans

3.) You are not a market-timing genius and neither is anyone selling services to you! There is a long-term path to progress, with several good ways to get aboard.  Be interested, be watchful, but do not be too confident. – Jeff Miller

4.) First, understand that ultimately you are responsible for the outcome of your investments and that they shouldn’t blame bad markets, bad advisors, or bad luck if they lose money.  Secondly, always try to stay as objective and unemotional as you can about what you invest in.  And lastly, remember that discipline and risk management is the key.  You can lose all the profits from five well managed trades or investments with one poorly managed one. 

IMF cites important risks to the outlook for US economy

IMF on the US.

The IMF is out with a series of headlines on the US economy as the coronavirus risks increase.  They say:

  • Cites important risks to outlook for US economy including resurgence in coronavirus cases, systematic increase in property
  • Significant increase in US debt levels creates vulnerabilities; sees risk of extended period of low or negative inflation
  • Repairing US economy will take prolonged period, further policy efforts needed to boost demand, support most vulnerable
  • US should reverse existing trade barriers, tariff increases that are undermining stability of global trade
  • US treatment of undervalued currencies as countervailable subsidy poses significant risk to global trading system
  • Sees areas where US financial oversight could be tightened to further mitigate systematic risks
  • US financial system has proven resilient, but crisis at early state and banks should continue to restrain capital distribution plans
The statements do not give a warm fuzzy feeling

Nikkei 225 closes higher by 2.22% at 22,784.74

Asian equities buoyed to kick start the new week

Nikkei 13-07

It has been a solid session for Asian equities, with the Nikkei closing at a one-month high while we are also seeing the Hang Seng post 1.1% gains and the Shanghai Composite also seen higher by 1.9% currently.

The positive spillovers from US trading at the end of last week is helping, but also the fact that US futures are keeping more optimistic so far today.
Some market participants are pointing to this Pfizer, BioNTech vaccine story as a factor, following the more positive results that were reported two weeks ago here.
In any case, risk is on and the market is looking to keep the more positive mood going into European trading today. As such, the dollar is weaker across the board alongside the yen, with AUD/USD hovering around 0.6980 currently.

World Bank cuts global growth forecasts for 2019 and 2020

They see some upside risks as trade risks cool

  • Cuts 2019 to 2.4% from 2.6% (lowest since crisis)
  • Cuts 2020 to 2.5% from 2.7%
  • Cuts 2020 emerging markets forecast to 4.1% from 4.6%
  • Forecasts 2020 trade growth at 1.9% vs 1.4% in 2019
  • Says growth in less developed regions far below levels needed to meet poverty-reduction goals

In a deeper breakdown, they boosted the 2020 US growth forecast while cutting China and Europe. On the whole, this isn’t great news for the global economy but it’s nothing surprising.

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