This week, the world’s biggest stock markets experienced a rebound. As expected, the Fed raised rates by 0.25 percentage points on Wednesday. The markets are still adjusting to the Ukraine conflict. Inflation is a permanent phenomenon. The supply chain could be clogged, household demand after the pandemic is high, and embargoes on Russia may cause inflation to reach new heights.
China’s Government is attempting to stabilize the financial markets and improve its economy. They also wish to create policies to protect property. Now that investors have heard these news, they are being more cautious. This has reignited their enthusiasm. Investors must be mindful that their optimism may be fragile and be easily shattered if there are bad news.
With its first interest rate hike since 2018, the U.S. central bank launched a monetary cycle last Wednesday. As was expected, this was the increase in the minimum union rate. It was a quarter of a point. The range is 0.25-0.50, and not 0.25-0.25. The theory goes that increasing rates will decrease the money supply, and therefore calm inflation. Transmission belts are not automatic or instantaneous. The Fed will increase rates continuously throughout the year to prevent the prices from overheating. The Fed is trying to maintain economic momentum, but not stop it. This is a delicate equilibrium, given the external shocks of the moment and the central banks’ late awakening.
This year, the US economy has been under a dark cloud.. The consumer sentiment is falling, the inflation figures are grim and there’s a decline in the consumer sentiment. Last week’s Federal Open Market Jay Powell, the chairman of the Federal Reserve in a committee press conference, was confident that the Fed can bring down inflation. This is unlikely to happen. The Consumer Price Index (CPI) for February, which measures the inflation rate at 7.9% annually came in at 7.9%.
This represents an increase of 7.5% from January 2021 and 7% from December 2021. CPI is predicted to increase in March after the Producers Price Index (PPI), which broke 10%, was released. As stated, the real inflation rate is much higher than 7.9%. If it were calculated the same way as the CPI of the 1970s, the figure would be around 16%.
The Fed is unlikely ever to be able, with increasing interest rates, to control inflation anytime soon. This is a strong belief. It was necessary for the Fed to raise interest rates at least as high as inflation to reverse the Great Inflation. With CPI at 7,9% and Fed increasing Federal Funds rate by 25 basis point each quarter, this could take many years. Powell claimed the main cause of inflation is due to demand and logistic bottlenecks. It’s fair. Powell said that he expected higher prices to temper demand, theoretically bringing inflation down.
The US inflation cycle of the 1960s is likely to repeat itself. Inflation was driven up by government spending on the Vietnam War, and President Lyndon Johnson’s Great Society. Johnson refused to cut government spending, which led to inflation, as we watch Congress pass large spending bills. Congress only passed Joe Biden’s American Rescue Plan in 2012, at a cost of $1.9 Trillion. This is a major expenditure that will impact the US economy. It’s unlikely to be the last big spending bill from the Biden Administration. Janet Yellen is the Treasury Secretary and she warned that there will be another year in which the US economy suffers. “very uncomfortably high” inflation. Jim Bullard of the St. Louis Fed Bank warned that inflation was not out of hand.
Jeff Gundlach, from DoubleLine, believes that inflation will reach 10% before it reaches 7.5% by the end of this year. Since 2017, Greg Jensen from Bridgewater and Ray Dalio of Bridgewater have predicted a new era for stagflation. It is the same. Fidelity’s Jurrientimmer believes that inflation will drop sharply and end up at 3-4 %. I find this highly unlikely. Jan Hatzius leads the charge. Hatzius forecasted a steep decline in inflation last year.
There are warnings. Larry Summers has, for example, warned about inflation. Summers says the Fed must raise rates. Interest rates reduced to 5% in order to combat inflation Summers says that a soft landing is unlikely to happen in the next four years, at 25 basis point per quarter. Other words, the Fed is going to push us into a recession.
Scott Minerd’s, Guggenheims’ economist, predicts a deflation when it comes to recession. He claimed earlier this summer that we would be heading towards an Eisenhower Depression, when the US underwent a post-war depression followed by deflationary collapse (1957-1958). In many of these months, there was no inflation. Kyle Bass from Hayman Capital believes that a recession could occur as early as this summer if the Fed raises interest rates above 1.5%. David Rosenberg predicts that a recession will occur this summer.
The US Gross Domestic Products (GD) reached 5.7% in the last year. Already, the economy is slowing down. The Atlanta Fed’s GDPNow is not expected to be released until the 30th of March, but this may change week by week.
TIPP Economic Optimism Index is continuing to show a downward trend. Empire State Manufacturing Survey, a leading indicator of GDP growth, is also showing a decrease.
Let’s conclude by looking at the logistics. As of yesterday, the wait times in Long Beach and Los Angeles – two of America’s most busy ports – have dropped from 15-25days last year to just 2-3days (bottom chart). There is still some disruption in key Chinese ports. This is a good sign. Shenzhen was reopened by Chinese authorities, while Yantian is still operating. The Chinese authorities may impose further lockdowns in the future, which could cause delays to shipping and raise costs for Freight of All Kinds from Far East Coast to West Coast (top-left of chart).
I don’t believe inflation will slow anytime soon. CPI could rise and remain high in the future, especially with PPI. numbers. We are entering a global crisis of food and a summer marked by increased consumer demand. Prices won’t fall until at least next year.
The markets were well prepared for the Fed’s move. After the announcement, there was some hesitation on the U.S. stock exchange. However, it quickly rose. Oddly, this does not seem to have any impact on the dollar. It remains stuck in its 1.10 USD/1 EUR range. The greenback, however, continued to climb in relation to the yen and reached JPY119.34. The news cycle of monetary tightening confirmed by the yield increase on U.S. 10 year debt to 2.155%. The Bund in Europe has a yield of 0.35%. OAT is 0.811%. And Gilt is 1.5%.
Financial advisors and investors should take note that the US 10YR yield went over 2% which is over the average S&P 500 dividend. We think that investors will begin to move away from equities and into more conservative, higher-paying investments like CDs.
We are looking for a Crypto Currency
This week the cryptocurrency market feels less nervous. In spite of a geopolitical atmosphere that is very volatile, the bitcoin market leader has been hovering at around $40,000 over many days. Investors might not be able purchase digital assets, which are considered high-risk in the current volatile economic and political environment. The situation will certainly test the nerves of crypto-investors. They are used high amplitudes in crypto-currency price.
The oil price has not dropped this week, despite the fact that it was volatile. These sessions have seen violent daily ups and downs. Operators closely watch the talks between Russian and Ukrainian delegations to determine if they show any signs of appeasement. This would indicate a drop in prices. The prices are above USD 100 at global Brent (USD 107) and WTI (USD 104). The supply is still tight. The International Energy Agency has asked OPEC to increase production significantly at the next monthly summit. This demand for production will not influence the cartel, which will continue its plan to gradually increase production quotas.
This is bad for you gold There are buyers who see that the price of gold is moving away USD 2,000 an ounce despite inflation, uncertainty and war in Europe. Investors have been displaying a renewed appetite for risk, as evidenced by the changes in major stock indexes around the world. Not only has gold suffered, but the precious metals sector as well. Silver, platinum, and palladium all saw a week-long decline. Industrial metals can now relax. After the entire segment’s rally, this is a legitimate break. Copper remains at USD 10,165, while tin climbs to USD 41.8550 and aluminum trades at USD 3288 a tonne. The LME has been struggling to get nickel trading back on track. Nickel prices have quickly exceeded the LME’s daily maximum limit of +/-5 %.