Archive for Economics & Fundamentals – Page 100

03 Aug

To fight financial illiteracy, we mapped our money system as waterworks

By Martijn Jeroen van der Linden, Hague University of Applied Sciences 

Over the past decade, the super-rich and large corporations have been able to borrow at record low interest rates. This influx of easy money has shored up markets for yacht-backed-loans and securities, dividends, share buy-backs, and merger and acquisition deals.

Meanwhile, those not deemed “creditworthy” find themselves barred from credit, the powerless witnesses of ever surging rents and living costs. Time and again, the financial sector has flooded certain parts of the economy while other parts remained parched. The question is: Why is it so hard to fix the money system?

Two parts of financial literacy

Lack of financial literacy among most citizens is at least one of the causes – though there are competing definitions of the latter. On 7 June, the European Commission (EC) lamented that “levels of financial literacy in the EU are too low”, posing a threat to “personal and financial well-being, households and society more broadly.”

However, here the institution takes a rather narrow view of financial education, limited to personal finance – i.e., teaching people how to manage budgets, achieve saving goals, and understand different financial products. Earlier in March, Sigrid Kaag, the Dutch Minister of Finance, echoed a similarly minimalist view of financial literacy: “By practising how to save, plan and make choices from a young age onwards, children learn how to make sound financial decisions.”

The other view of financial literacy, which we support, entails a far more ambitious understanding of the money system. We call it systemic financial literacy. “In the age of the CDS and CDO, most of us are financial illiterates”, wrote US financial journalist Matt Taibbi in 2009, referring to the complex financial products that triggered the Great Recession. Fast forward fourteen years later, and most of us remain unfamiliar with the jargon of economists, bankers and tax experts. As in 2009, today’s democracies continue to be divided into what Taibbi describes as a “two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.”

With this in mind, we believe any project seeking to boost financial literacy ought to educate us on the roles of a central bank, but also payment infrastructure, the tax regime, and the investment of our pension savings. A number of questions ought to be raised, too, to this end: What do we consider public utilities? Which financial services can better be assigned to private companies? Who gets the power to create and allocate new money – and for what purposes? To answer these big questions requires not only a deeper understanding of the structures of finance, but continuous political engagement.

The waterworks

Together with cartographer Carlijn Kingma and investigative financial journalist Thomas Bollen, we sought to create a project that would inspire such questions and demystify the world of finance. For two and half years, we developed the “waterworks of money”, an architectural visualisation of our money system that bypasses the economic jargon.

Kingma spent 2,300 hours drawing this map by hand, based on in-depth research and interviews with more than 100 experts – from central bank governors and board members of pension funds and banks to politicians and monetary activists. In an animated video, we walk you through a metaphorical representation of our money system, its hidden power made manifest.

What do we water?

The metaphor of water was critical to the design of our map. Indeed, the financial sector is to the economy what an irrigation system is for farming lands. Just as irrigation helps crops grow, money allows the economy to flourish.

The architecture of our financial irrigation system and the way the sluices and floodgates are operated impacts us all. “What do we water, and what goes dry?” Kaag asked economists, bankers and reporters in June 2022. “Choices made by the financial sector determine what grows and what dies off. That’s where banks, pension funds, asset managers, and insurance firms can make a difference,” she said.

‘The Waterworks of Money’, an architectural map of the money system drawn by cartographer Carlijn Kingma.
Fourni par l’auteur

In our map, the long and complex process of financial irrigation starts at the top of the so-called tower of society, where big money keeps their reservoirs. The world’s largest companies, including big oil, big pharma and big retail, are lodged there. Open the floodgates and money flows downstream, setting the wheels of industry in motion. Salaries make their way through the waterworks, and trickle down into employee piggy banks. In return, everyone goes to work.

Money eventually seeps down into the lowest ranks of society, where the conveyor belt is always running, products are assembled and raw materials, mined. People then spend the wages they’ve earned, often in shops and businesses. Sale revenues get pumped up to the reservoir at the top, and the cycle starts all over again. Or at least, that is the idea.

In reality, trickle-down economics popularised by US president Ronald Reagan and UK prime minister Margaret Thatcher, does not take place. Money circulates mainly between the top of the tower and the financial sector. Moreover, the huge growth of the financial sector over the last decades has dug the gap between the haves and have-nots deeper. The growing quantity of money is driving up share prices, house prices and management fees, but most of the money does not reach the everyday economy in the tower of society – where it can be used for productive investments, generates income and add social value.

The structure of our money system is not a natural phenomenon. The way the waterworks are put together is a political choice. In democracies, higher levels of systemic financial literacy are a prerequisite to change this architecture and make the financial sector serve society better.

This article was co-written with investigative financial journalist Thomas Bollen and cartographer Carlijn Kingma.The Conversation

Martijn Jeroen van der Linden, Professor of Practice in New Finance, Hague University of Applied Sciences

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions
02 Aug

Rate hikes may have slowed inflation in the US – but they have also heightened the risk of financial crises for lower-income nations

By Cristina Bodea, Michigan State University 

The campaign to fight U.S. inflation by upping interest rates has been going on for a year and a half – and its impacts are being felt around the world.

On July 26, 2023, the Federal Reserve announced another quarter-point hike. That means U.S. rates have now gone up 5.25 percentage points over the past 18 months. While inflation is now coming down in the U.S., the aggressive monetary policy may also be having significant longer-term impact on countries across the world, especially in developing countries. And that isn’t good.

I study how economic phenomena such as banking crises, periods of high inflation and soaring rates affect countries around the world and believe this prolonged period of higher U.S. interest rates has increased the risk of economic and social instability, especially in lower-income nations.

Ripples around the world

Monetary policy decisions in the U.S., such as raising interest rates, have a ripple effect in low-income countries – not least because of the central role of the dollar in the global economy. Many emerging economies rely on the dollar for trade, and most borrow in the U.S. dollar – all at rates influenced by the Federal Reserve. And when U.S. interest rates go up, many countries – and especially developing ones – tend to follow suit.

This is largely out of concern for currency depreciation. Raising U.S. interest rates has the effect of making American government and corporate bonds look more attractive to investors. The result is footloose foreign capital flows out of emerging markets that are deemed riskier. This pushes down the currencies of those nations and prompts governments in lower-income nations to scramble to mirror U.S. Federal Reserve policy. The problem is, many of these countries already have high interest rates, and further hikes limit how much governments can lend to expand their own economies – heightening the risk of recession.

Then there is the impact that raising rates in the U.S. has had on countries with large debts. When rates were lower, a lot of lower-income nations took on high levels of international debt to offset the financial impact of the COVID-19 pandemic and then later the effect of higher prices caused by war in Ukraine. But the rising cost of borrowing makes it more difficult for governments to cover repayments that are coming due now. This condition, called “debt distress,” is affecting an increasing number of countries. Writing in May 2023, when he was still president of the World Bank, David Malpass estimated that some 60% of lower-income countries are in or high risk of entering debt distress.

More broadly, any attempt to slow down growth to lower inflation in the U.S. – which is the intended aim of raising interest rates – will have a knock-on effect on the economies of smaller nations. As borrowing costs in the U.S. increase, businesses and consumers will find themselves with less cheap money for all goods – domestic or international. Meanwhile, any fears that the Fed has pulled on the brakes too quickly and is risking recession will suppress consumer spending further.

The risk of spillover

This isn’t just theory – history has shown that in practice it is true.

When then-Fed Chair Paul Volcker fought domestic inflation in the late 1970s and early 1980s, he did so with aggressive interest rate hikes that pushed up the cost of borrowing around the world. It contributed to debt crises for 16 Latin American countries and led to what became known in the region as the “lost decade” – a period of economic stagnation and soaring poverty.

The current rate increases are not of the same order as those of the early 1980s, when rates rose to nearly 20%. But rates are high enough to prompt fears among economists. The World Bank’s most recent Global Economic Prospects report included a whole section on the spillover from U.S. interest rates to developing nations. It noted: “The rapid rise in interest rates in the United States poses a significant challenge to [emerging markets and developing economies],” adding that the result was “higher likelihood” of financial crises among vulnerable economies.

Widening the wealth gap

Research I conducted with others suggests that the kind of financial crises hinted at by the World Bank – currency depreciation and debt distress – can rip the social fabric of developing countries by increasing poverty and income inequality.

Income inequality is at an all-time high – both within individual countries and between the richer and developing countries. The 2022 World Inequality Report notes that, currently, the richest 10% of individuals globally take home 52% of all global income, while the poorest half of the global population receives a mere 8.5%. And such a wealth gap is deeply corrosive for societies: Inequality of income and wealth has been shown to both harm democracy and reduce popular support for democratic institutions. It has also been linked to political violence and corruption.

Financial crises – such as the kind that higher interest rates in the U.S. may spark – increase the chance of economic slowdowns or even recessions. Worryingly, the World Bank has warned that developing nations face a “multi-year period of slow growth” that will only increase rates of poverty. And history has shown that the impact of such economic conditions fall hardest on lower-skilled low-income people.

These effects are compounded by government policies, such as cuts in spending and government services, which, again, disproportionately hit the less well-off. And if a country is struggling to pay back sovereign debt as a result of higher global interest rates, then it also has less cash to help its poorest citizens.

So in a very real sense, a period of higher interest rates in the U.S. can have a detrimental effect on the economic, political and social well-being of developing nations.

There is a caveat, however. With inflation in the U.S. slowing, further interest rate increases may be limited. It could be the case that regardless of whether Fed policy has threaded the needle of slowing the U.S. economy but not by too much, it has nonetheless sown the seeds of more potentially severe economic – and social – woes in poorer nations.The Conversation

About the Author:

Cristina Bodea, Professor of Political Science, Michigan State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 

Economics & Fundamentals Opinions
02 Aug

There are signs of a slowing labor market in New Zealand. The Bank of Japan will continue to maintain the stimulus policy

By JustMarkets

The US stock indices were traded yesterday without any unified dynamics. At the close of the stock exchange yesterday, the Dow Jones Index (US30) rose by 0.20%, and the S&P 500 Index (US500) fell by 0.27%. The NASDAQ Technology Index (US100) closed yesterday negative by 0.43%.

The US service sector continues to perform relatively strongly, but manufacturing is struggling, as evidenced by the ninth consecutive decline of the ISM index. At the same time, residential construction is picking up due to a shortage of homes for sale, and non-residential starts are struggling due to tighter credit conditions. The July ISM manufacturing index rose to 46.4 from 46.0 (consensus 46.9), but given that it is below the 50 level, this still indicates a contraction in the sector, and this is the ninth consecutive month of contraction. The New Orders Index rose to 47.3 from 45.6 (a contraction, but slower than in June), and the Manufacturing Index ISM jumped to 48.3 from 46.7. Despite the rising reading, all components related to manufacturing activity remain in contraction territory.

The US labor market has begun to show the first signs of cooling. According to the JOLTS report, job openings fell to 9.582 million in June from a downward revised May figure of 9.616 million. The consensus had expected a result of 9.6 million. Also weak was the employment figure, which fell to 44.4 from 48.1, the lowest level in three years. Only 17% of industries reported an increase in hiring, down from 33% in June. Such data suggests Friday’s Nonfarm Payrolls report will be weak.

Pfizer Inc (PFE) reported mixed quarterly results. Profit exceeded forecasts, but revenue fell short of expectations. The company also lowered its full-year earnings outlook, warning of near-term revenue challenges. Merck & Company Inc (MRK), meanwhile, reported a narrower loss as second-quarter revenue exceeded analysts’ forecasts, helped by higher sales of cancer drug Keytruda. Uber Technologies Inc (UBER) shares rose more than 2% after its third-quarter outlook was better than the second-quarter results but missed analysts’ forecasts on both the top and bottom lines.

Equity markets in Europe fell yesterday. Germany’s DAX (DE40) decreased by 0.85%, France’s CAC 40 (FR40) fell by 0.85%, Spain’s IBEX 35 (ES35) lost 0.89%, and the UK’s FTSE 100 (UK100) closed negative by 0.43%.

Oil prices rose in Asian trading on Wednesday, remaining at more than three-month highs, as industry data pointed to a much larger-than-expected decline in US inventories over the past week.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) increased by 0.92% yesterday, China’s FTSE China A50 (CHA50) was up by 0.38%, Hong Kong’s Hang Seng (HK50) decreased by 0.34% on Tuesday, and Australia’s S&P/ASX 200 (AU200) was positive by 0.54%. Most Asian stocks started to fall at the open on Wednesday, with technology stocks facing profit-taking after Fitch unexpectedly downgraded the US sovereign rating.

The Bank of Japan’s decision last week to change its policy of controlling bond yields was aimed at making the massive stimulus more sustainable, not a retreat from ultra-low interest rates, BOJ Deputy Governor Shinichi Uchida said Wednesday. Uchida also said there is still a long way to go before conditions are ripe for raising the short-term interest rate from the current level of minus 0.1%.

New Zealand’s unemployment rate rose in the second quarter, and wage inflation showed signs of slowing, suggesting that the labor market is starting to weaken after continuous rate hikes by the Central Bank. The unemployment rate rose to 3.6% from 3.4%. Economists expect further deterioration in New Zealand’s labor market conditions.

S&P 500 (F)(US500) 4,576.72 −12.24  (-0.27%)

Dow Jones (US30) 35,630.55  +71.02 (+0.20%)

DAX (DE40)  16,307.64 −139.19  (-0.85%)

FTSE 100 (UK100) 7,666.27 33.14 (-0.43%)

USD Index  102.23 +0.37 (+0.36%)

Important events for today:
  • – New Zealand Unemployment Rate (q/q) at 01:45 (GMT+3);
  • – Japan Monetary Policy Meeting Minutes at 02:50 (GMT+3);
  • – US ADP Nonfarm Employment Change (m/m) at 15:15 (GMT+3);
  • – US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
02 Aug

Fitch downgrades US: What you need to know

By ForexTime

The US has lost its top-tier AAA credit rating as assigned by Fitch Ratings, now downgraded down one level to AA+.

US Treasury Secretary Janet Yellen “strongly disagreed” with Fitch’s decision, blasting it as “arbitrary and based on outdated data”.

But that hasn’t stopped global markets from adopting a slightly risk-off mode for the time being:

  • US stock futures are falling to extend August’s losses so far
  • Gold is edging higher though still trading around the mid-$1900s
  • The safe haven Japanese Yen is the only G10 currency to climb against the US dollar

However, the full fallout directly from this downgrade should prove to be limited and short-lived.

Read on to find out more.

 

What does Fitch Ratings do?

Fitch Ratings assigns a credit rating to various entities that issue debt, ranging from governments to corporates.

  • Fitch’s highest rating is ‘AAA’, which means the country/company has the lowest risk of defaulting, i.e. has an “exceptionally strong capacity” to meet its financial commitments, such as paying interest on a bond.
  • The lowest rating is ‘D’, which is assigned when the debt issuer has entered into bankruptcy proceedings.

This credit rating points to the financial strength and ability to meet debt commitments, such as making interest payments on bonds issued.

 

How do investors use these credit ratings?

Global investors rely on these credit ratings to decide which country’s debt to buy:

  • Debt with the ‘AAA’ through ‘BBB’ ratings are deemed as investment grade (low to moderate risk of default).
  • Debt issuers with ‘BB’ and lower ratings are deemed as “speculative grade” (high risk of default, i.e. not able to meet its payment obligations).

    Investors with a higher tolerance for risk may buy such debt with lower credit ratings, as they tend to offer higher yields to compensate investors for the greater risk of default.

In short, the higher the credit rating, the “safer” the investment is deemed, and vice versa.

 

Why was the US downgraded?

The US was downgraded because Fitch Ratings expects the following:

  • “Fiscal Deterioration”: US government’s financial strength to worsen over the next 3 years.
  • “Rising Deficit”: US government set to spend more money at a faster pace than it can generate income (taxes), resulting in a bigger budget gap.
  • “Erosion of governance”: the repeated debt-ceiling standoffs in US Congress elevates the risk of a first-ever US default, which was only just narrowly avoided this past May.

This downgrade is a follow-through on Fitch’s warning, made back in May, amidst the US debt ceiling drama.

Fitch Rating’s full statement can be found here.

 

Has this happened before for the US?

Yes, almost exactly 12 years ago.

The US experienced its first-ever credit rating downgrade back in August 2011, by S&P – another credit ratings agency.

Hence, given that Fitch’s move is not unprecedented (we’ve seen it before over a decade ago), nor does it unveil anything startling that market’s don’t already know, that should explain the relatively muted reaction in the markets.

 

Are markets reacting as expected?

Yes, but not without a tinge of irony.

Amidst the risk-off moves mentioned at the top of this article …

the US dollar – the world’s “preeminent” reserve currency – is also gaining against other currencies, including many of its G10 and emerging-market counterparts.

 

Why is the USD’s strength ‘ironic’?

Typically, if a country’s credit rating is downgraded, the initial reaction would be for investors to shy away from its assets and currency.

But this is the United States that we’re talking about here – the world’s largest economy!

After all, global financial markets and investors have long seen US Treasuries (debt issued by the US government) as the “golden-standard” for risk-free assets.

Hence, investors have been flocking to shorter-term US Treasuries (yields on 2-year and 5-yearTreasuries are moving lower) as such “safe haven” assets help investors protect their wealth amid times of uncertainty.

Ironic, given that Fitch Rating’s downgrade actually casts doubt over the US government’s ability to meet its debt obligations.

 

How long will the risk-off mode last?

Not long, probably.

At least in terms of whatever market reaction that can and should be attributed to today’s decision by Fitch Ratings.

After all, long-time investors will point to how the S&P 500 – the benchmark for US stock markets – recovered all its losses within 6 months after that first-ever US credit ratings downgrade back in August 2011.

Back then, the S&P 500 surged by nearly 30% between that August 2011 intraday trough until that peak in early-April 2012.

 

In today’s context, investors appear to have greater concerns at present.

The likelihood of a global recession and the risk of further Fed rate hikes – these factors are set to be the greater catalyst for a sustained risk-off mode across global financial markets, rather than Fitch’s downgrade of the US.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
01 Aug

The RBA left the interest rate unchanged again. Rising oil prices boost energy sector growth

By JustMarkets

At yesterday’s stock market close, the Dow Jones Index (US30) increased by 0.28%, while the S&P 500 Index (US500) was up by 0.15%. The NASDAQ Technology Index (US100) closed positive by 0.21% on Monday. The Dow Jones Index closed higher for the second consecutive month. Investors are waiting for the US Federal Reserve to end its tightening cycle soon. But the market volatility indicator VIX, which is known in trading circles as the fear indicator, is still near this year’s lows and at its lowest point since the global pandemic began in 2020. That means a correction could occur on stock indices in the near term.

Energy stocks are rising on the back of Chevron’s upgrade. Energy stocks were boosted by a more than 3% increase in shares of Chevron (CVX) after Goldman Sachs upgraded the major oil company’s rating, indicating its strong growth potential. Energy stocks were also boosted by a rise in oil prices to multi-month highs amid expectations of tightening supply and rising demand.

Johnson & Johnson (JNJ) fell by 4% after a court on Friday rejected the company’s plan to put its subsidiary LTL Management into bankruptcy to deal with tens of thousands of lawsuits alleging the company’s talcum powder causes cancer.

Equity markets in Europe traded flat yesterday. Germany’s DAX (DE40) decreased by 0.14%, France’s CAC 40 (FR40) added 0.29%, Spain’s IBEX  5 (ES35) lost 0.45%, and the UK’s FTSE 100 (UK100) closed positive by 0.07%.

In the Eurozone, overall inflation fell in July, while core inflation remained unchanged. At the same time, services inflation rose again. Services inflation increased to 5.6% y/y in July from 5.4% y/y in June. An increase in services inflation is not what the ECB would like to see, as services prices are most sensitive to wage growth and could indicate that the labor market remains too tight. ECB President Christine Lagarde reiterated that the ECB could still raise rates in the future if needed, calling GDP data from Spain, France, and Germany “encouraging.” This increases the likelihood that the ECB will hold another 0.25% rate hike at its September meeting.

The growing divergence between gold futures and the spot price indicates that traders expect the Fed to complete its rate hike cycle before the end of the year, which is expected to lead to a large influx of funds into precious metals.

Asian markets rallied strongly last week. Japan’s Nikkei 225 (JP225) rose by 1.26% yesterday, China’s FTSE China A50 (CHA50) added 0.27%, Hong Kong’s Hang Seng (HK50) gained 0.82% on Monday, and Australia’s S&P/ASX 200 (AU200) ended the day positive by 0.09%. Most Asian stocks continued to rise on Tuesday. Optimism about an improving global economic outlook amid lower inflation and sustained growth in major economies is driving capital inflows into risky stocks. Sentiment for Japanese stocks was boosted by the Bank of Japan’s emergency bond purchases, raising bets that the BOJ will not be in a rush to tighten policy.

Australia’s Central Bank left its interest rate at 4.1% for the second consecutive month but warned that some more tightening may be needed to contain inflation. The Reserve Bank of Australia (RBA) forecasts core inflation to slow to around 3.25% by the end of 2024 and return to within the target range of 2-3% by the end of 2025.

S&P 500 (F)(US500) 4,588.96 +6.73  (+0.15%)

Dow Jones (US30)  35,559.53 +100.24 (+0.28%)

DAX (DE40)  16,446.83 −22.92 (-0.14%)

FTSE 100 (UK100) 7,699.41 +5.14 (+0.07%)

USD Index  101.89 +0.26 (+0.26%)

Important events for today:
  • – Japan Unemployment Rate (m/m) at 02:50 (GMT+3);
  • – Australia RBA Interest Rate Decision (m/m) at 07:30 (GMT+3);
  • – Australia RBA Rate Statement (m/m) at 07:30 (GMT+3);
  • – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
  • – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
  • – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
  • – Eurozone Unemployment Rate (m/m) at 12:00 (GMT+3);
  • – Canada Manufacturing PMI (m/m) at 16:30 (GMT+3);
  • – US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3);
  • – US JOLTs Job Openings (m/m) at 17:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
01 Aug

Markets Brace For Another Event Heavy Week

By ForexTime

Asian markets were a mixed bag on Tuesday as weak China data countered the initial optimism set off by Wall Street overnight, after the benchmark S&P 500 notched its fifth consecutive monthly gain. European shares are flashing red amid the market caution with risk appetite taking another hit thanks to disappointing manufacturing activity data. Looking at currencies, the USD seems to be drawing strength from the tense mood while the Australian dollar has weakened across the board after the Reserve Bank of Australia left interest rates unchanged. Elsewhere, oil prices have slipped after bagging its biggest monthly gain since early 2022, while gold is wobbling around $1955 pressured by an appreciating buck.

Big week for the dollar

The greenback has kicked off the new month on a firm note, appreciating against every single G10 currency.

Dollar bulls seem to be drawing strength from cautious sentiment and a sense of anticipation ahead of some key data this week. Given the Federal Reserve’s shift to data dependence, every US economic release moving forward will act as a key piece of information that may determine whether the Fed raises rates one final time in 2023 or not. This could translate to increased volatility for the US dollar over the next few months.

Focus will be directed towards the US ISM manufacturing report later today which has been in contractionary territory since November 2022. But the main risk event and potential market shaker will be the July nonfarm payrolls (NFP) on Friday. Ultimately, a weaker-than-expected jobs report could support the argument around the Fed being done with raising rates in 2023.

Currency spotlight – GBPUSD 

Sterling may experience heightened volatility this week due to the Bank of England rate decision on Thursday. Given how the decision will be accompanied by the quarterly Monetary Policy Report (MPR), this Super Thursday combo could send GBPUSD on a roller coaster ride. Markets widely expect the BoE to raise interest rates by 25bp in the face of sticky inflation. However, recession fears remain elevated amid disappointing data, and this could offer support to the doves on the MPC. Should the central bank surprise markets with a 50bp hike, this could send the British Pound surging across the board.

Commodity Spotlight – Gold 

The Fed’s shift to data dependence may translate to heightened volatility for gold, with the precious metal poised to display increased sensitivity to Friday’s NFP report.

Given how markets are only pricing in a 19% probability of a rate hike in September with this jumping to 37% by November, gold bulls remain in a comfortable position. However, September’s Fed meeting is just less than two months away which is enough time for much to happen.

Nevertheless, the path of least resistance for gold points north with a disappointing jobs report on Friday potentially opening a path back toward $1985. A solid breakout above this point could open the doors toward the psychological $2000 level. Should prices slip back below the 50-day SMA, a decline toward $1940 and $1932 could be on the cards.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
31 Jul

Falling inflation figures in the US increase the likelihood of a pause at the September Fed meeting

By JustMarkets

At Friday’s close, the Dow Jones Index (US30) increased by 0.5% (+0.65% for the week), while the S&P 500 Index (US500) added 0.99% (+0.85% for the week). The NASDAQ Technology Index (US100) closed positive by 1.90% (+1.67% for the week) on Friday.

Core PCE data is the Fed’s preferred inflation gauge. The 0.5% decline from the May reading only reinforced hopes that the Fed has likely ended the current rate hike cycle. Combined with labor costs rising at the slowest pace in two years, this may explain some of the weakness in the US Dollar late last week. There is a lot of US labor market data coming out this week, including the NFP report. This data will provide another snapshot of the state of the US economy. Average hourly earnings will again be a key indicator for the Fed, as strong wage growth has been cited as a problem in the ongoing fight against inflation.

Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE40) rose by 0.39% (+2.13% for the week), France’s CAC 40 (FR40) gained 0.15% (+0.96% for the week), Spain’s IBEX 35 (ES35) declined by 0.09% (+2.86% for the week), and the UK’s FTSE 100 (UK100) closed positive by 0.02% (+0.40%for the week).

This week, the Bank of England will hold a monetary policy meeting on Thursday. Analysts at HSBC expect the Bank of England to maintain a hawkish stance and raise the rate by 50 basis points to 5.50%. At the same time, JP Morgan believes that even though the Bank of England still has a lot of work to do, an increase of 25 basis points is expected.

Interest rate hikes by the US Federal Reserve and the European Central Bank are holding back gold and silver prices. However, Fed Chairman Jerome Powell and ECB President Christine Lagarde were cautious in their press conferences, reinforcing expectations that interest rates are close to peaking. This means that once the US and ECB central banks complete their tightening cycle, precious metals will receive fundamental support. Analysts predict that late 2023 and all of 2024 will be a bullish period for gold and silver on the back of a declining dollar index.

Crude oil prices (WTI and Brent) continued their upward movement. Many factors contributed to this, but primarily the weakening of the US dollar. This week will start with the release of key data from China, the NBS PMI, which is expected to push oil prices higher. In connection with the recent announcement of OPEC+ on the extension of production cuts for August, whether the organization will decide to continue the reduction in September has been raised again. Market experts are inclined to believe that the production cut will continue.

Asian markets grew steadily last week. Japan’s Nikkei 225 (JP225) gained 0.34% for the week, China’s FTSE China A50 (CHA50) jumped by 6.12%, Hong Kong’s Hang Seng (HK50) gained 5.56% for the week, and Australia’s S&P/ASX 200 (AU200) closed positive by 1.23% for the week.

On Friday, traders saw two major surprises from Japan. First, the Bank of Japan adjusted its yield curve control policy slightly and made it more flexible in its management. Second, inflation in Tokyo unexpectedly rose to 3.2% in July. But despite this, the BoJ lowered its long-term inflation forecasts, thus keeping the possibility for further easing.

S&P 500 (F)(US500) 4,582.23 +44.82  (+0.99%)

Dow Jones (US30) 35,459.29 +176.57 (+0.50%)

DAX (DE40)  16,469.75 +63.72 (+0.39%)

FTSE 100 (UK100) 7,694.27 +1.51 (+0.020%)

USD Index  101.70 -0.07 (-0.07%)

Important events for today:
  • – Japan Industrial Production (m/m) at 02:50 (GMT+3);
  • – Japan Retail Sales (m/m) at 02:50 (GMT+3);
  • – Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
  • – China Manufacturing PMI (m/m) at 04:30 (GMT+3);
  • – China Non-Manufacturing PMI (m/m) at 04:30 (GMT+3);
  • – German Retail Sales (m/m) at 09:00 (GMT+3);
  • – Switzerland Retail Sales (m/m) at 09:30 (GMT+3);
  • – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+3);
  • – Eurozone GDP (q/q) at 12:00 (GMT+3);
  • – Eurozone GDP (q/q) at 12:00 (GMT+3);

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
28 Jul

The Bank of Japan is taking the first small step towards normalizing monetary policy. ECB is not sure about further rate hikes

By JustMarkets

At yesterday’s stock market close, the Dow Jones Index (US30) closed down by 0.67%, while the S&P 500 Index (US500) fell by 0.64%. The NASDAQ Technology Index (US100) closed negative by 0.55% on Thursday.

The latest US GDP data showed that the economy grew by 2.4% for the second quarter after growing 2.0% in the first quarter. Analysts had expected growth of 1.8%. Gross Domestic Product increased due to solid consumer spending and robust business investment. Combined with other data showing stronger than expected durable goods orders and a decline in unemployment claims, boosted confidence that the Federal Reserve can curb inflation and avoid a recession.

Meta Platforms (META) rose more than 4% after the social media giant reported second-quarter guidance and results that beat Wall Street estimates, driven by strong advertising growth. UBS raised its target on META shares to $400 from $335. Shares of eBay (EBAY), meanwhile, fell by 10% after its earnings forecast for the current quarter missed analysts’ estimates and overshadowed better-than-expected second-quarter results.

Equity markets in Europe were mostly up yesterday. Germany’s DAX (DE40) rose by 1.70%, France’s CAC 40 (FR40) gained 2.05%, Spain’s IBEX 35 (ES35) added 1.08%, and the UK’s FTSE 100 (UK100) closed positive by 0.21%.

The European Central Bank raised interest rates by 25 basis points to 4.25% in line with expectations while emphasizing that inflation is expected to remain high for a longer period despite the recent decline. During the press conference, Lagarde emphasized the weaker economic outlook for the euro area economy in the near term but remained optimistic about a recovery in growth in the medium term. Lagarde remained evasive when asked about the possibility of a rate hike in September. This is a dovish sign, given that the ECB president has previously been quite hawkish when pushing for future rate hikes.

On Thursday, gold posted its sharpest one-day drop since late June, reacting to the US Federal Reserve getting back on the path of monetary tightening by announcing a 25 basis point rate hike in July and again pledging to stick to a hawkish policy to bring inflation to its long-term 2% target. Also influential was the European Central Bank’s quarter-point rate hike and a signal that the ECB may pause in September, a potentially dovish development that pushed the dollar higher against the euro, exacerbating gold’s decline.

Asian markets were predominantly rising yesterday. Japan’s Nikkei 225 (JP225) rose by 0.68%, China’s FTSE China A50 (CHA50) gained 0.20%, Hong Kong’s Hang Seng (HK50) ended the day up by 1.41%, and Australia’s S&P/ASX 200 (AU200) ended Thursday positive by 0.73%. At the open on Friday, Japan’s Nikkei 225 index (JP225) suffered sharp losses after somewhat aggressive statements from the Bank of Japan, while Chinese stocks posted gains on hopes of additional stimulus measures.

Japanese government bond yields rose sharply on Friday, hitting the top end of the Bank of Japan’s benchmark range. The BOJ kept interest rates ultra-low on Friday and said that while it will continue yield curve control (YCC) operations, it will manage the yield curve with “greater flexibility.” The statement said it is appropriate to enhance the sustainability of monetary policy easing under the current framework by conducting more flexible yield curve control and responding promptly to both upside and downside risks to economic activity and prices in Japan. The move marks a step toward potentially ending the ultra-soft monetary conditions that Japanese equities have enjoyed for nearly a decade.

Australian retail sales unexpectedly fell in June, suggesting that consumers are easing off in response to 12 interest rate hikes by the Reserve Bank of Australia (RBA). Sales fell by 0.8% from the previous month.

China’s top housing official has increased pressure on financial regulators and lenders to step up efforts to revive the country’s struggling real estate sector.

S&P 500 (F)(US500) 4,537.41 −29.34  (−0.64%)

Dow Jones (US30) 35,282.72 −237.40 (−0.67%)

DAX (DE40)  16,406.03 +274.57 (+1.70%)

FTSE 100 (UK100) 7,692.76 +15.87 (+0.21%)

USD Index  101.81 +0.93 (+0.92%)

Important events for today:
  • – Japan Tokyo Core CPI (m/m) at 02:30 (GMT+3);
  • – Japan BoJ Interest Rate Decision at 06:00 (GMT+3);
  • – Japan BoJ Monetary Policy Statement at 06:00 (GMT+3);
  • – Japan BoJ Outlook Report at 06:00 (GMT+3);
  • – Japan BoJ Press Conference at 09:00 (GMT+3);
  • – Germany Consumer Price Index (m/m) at 15:00 (GMT+3);
  • – Canada GDP (m/m) at 15:30 (GMT+3);
  • – US PCE Price index (m/m) at 15:30 (GMT+3);
  • – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
28 Jul

Week Ahead: US NFP Report May Rock These 3 Markets

By ForexTime 

If you thought this was a volatile week jampacked with high-risk events, then just wait until you see what’s in store for the first week of August…

Investors may struggle to catch their breath in the week ahead due to a mashup of key economic reports, more central bank meetings, and a slew of corporate earnings from the largest companies in the world!

The first trading week of August features these scheduled economic data releases and events:

Monday, July 31

  • CNY: China manufacturing & non-manufacturing PMI
  • JPY: Japan industrial production, retail sales
  • EUR: Eurozone Q2 GDP, CPI, Germany Q2 GDP
  • UK100_m: HSBC earnings

Tuesday, August 1

  • AUD: RBA rate decision
  • CNH: China Caixin manufacturing PMI
  • EUR: Eurozone & Germany Global Manufacturing PMI, unemployment
  • GBP: UK S&P Global/CIPS manufacturing PMI
  • USD: US ISM manufacturing, job openings
  • SPX500_m: Pfizer earnings

Wednesday, August 2

  • NZD: New Zealand unemployment
  • JPY: Bank of Japan meeting minutes (June)

Thursday, August 3

  • CNH: China Caixin Services PMI
  • EUR: Eurozone S&P Global Services PMI, PPI
  • GBP: BOE rate decision
  • USD: US initial jobless claims, factory orders, ISM services
  • NQ100_m: Amazon, Apple earnings

Friday, August 4

  • CNH: China balance of payments
  • EUR: Eurozone retail sales, Germany factory orders
  • CAD: Canada unemployment
  • Oil: OPEC+ alliance virtual meeting
  • USD: US July nonfarm payrolls (NFP)

Given the high-quality list of risk events, it may be wise to strap up and fasten your seatbelts.

Our focus falls on the US July nonfarm payrolls (NFP) which could rock global financial markets.

The US jobs data could offer critical insight into the Fed’s next move, especially after the central bank’s recent shift to data dependence. After raising interest rates to the highest level in 22 years in an effort to combat inflation, the Fed has adopted a “wait-and-see” approach for future moves. So essentially, the jobs report has become a critical piece of the equation to determine what the Fed could do at its next policy meeting in September. Note that the Fed wants to see more weakness in the jobs markets which could translate to cooling inflationary pressures.

What are markets forecasting?

  • Headline NFP number: 190,000 new jobs added to the US economy in July
  • Unemployment rate: 3.6%
  • Average hourly earnings: 4.2% rise year-on-year (July 2023 vs. July 2022)

Potential outcomes to the US NFP report

  • A stronger-than-expected US jobs report may fuel speculation around the Federal Reserve raising interest rates one final time in 2023.
  • A weaker-than-expected US jobs report could support the argument that the Federal Reserve ended its hiking cycle in July.

What are markets forecasting for the Fed’s next rate moves?

  • 19% chance of a 25 basis points hike in September 2023
  • 37% chance of a 25-basis point hike by November 2023
  • 20% chance of a 25-basis point hike by December 2023

Ultimately, these expectations are likely to be influenced by the multiple jobs, inflation, and other key reports published over the next few months.

With all the above discussed, here’s how these 3 assets could react to the US jobs report:

  1. USD Index

Given how the dollar remains sensitive to the Fed hike expectations, we could see some fireworks on Friday.

  • A stronger-than-expected US jobs report may fuel bets around the Fed hiking rates one more time in 2023, injecting dollar bulls with renewed confidence. This may propel the USD Index towards 102.32, just below the 100-day Simple Moving Average.
  • A weaker-than-expected US jobs report could fuel speculation around the Fed being done with rate hikes, resulting in a weaker dollar. This development could see the USD Index slip back below the 100.72 level.

  1. NQ100_m

Expect some action on the Nasdaq 100 which is jampacked with US tech stocks that are sensitive to US rate hike expectations.

  • A stronger than expected US jobs report is seen boosting expectations around Fed hike down the line. Such an outcome could see the NQ100_m slip back below the 15300-support level.
  • A weaker-than-expected US jobs report that boosts bets around the Fed’s hiking cycle ending in July could propel the NQ100_m above 15700 with 15947 acting as a level of interest.

 

  1. Gold

The pending NFP report could be the catalyst zero-yielding gold has been waiting for to breakout out of its current range.

  • A stronger-than-expected US jobs report may lead to higher bets around the Fed hiking rates once more in 2023. This development could drag prices back below $1932 with $1900 acting as a key level of interest.
  • A weaker-than-expected US jobs report may support expectations around no more US rate hikes this year. These prospects could push gold higher towards $1985 and $2000, respectively.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Opinions
27 Jul

The Fed raises rates by 25 bps, keeping the bias toward further action. The ECB intends to raise rates until the fall

By JustMarkets

At yesterday’s stock market close, the Dow Jones Index (US30) increased by 0.23%, while the S&P 500 Index (US500) was down by 0.02%. The NASDAQ Technology Index (US100) closed positive by 0.12% on Wednesday.

The US Central Bank raised rates by 25 bps to 5.50%, the highest in 22 years. But the market was fully ready for such a decision, so there were no surprises here. The main focus of investors was directed to the FOMC press conference.

The main theses of the Fed Chairman Jerome Powell’s speech:

  • Core inflation remains high (current Core CPI 4.8%);
  • The FOMC is committed to returning inflation to the 2.0% target to achieve price stability (current CPI 3.0%);
  • Inflation is not projected to reach the 2.0% target until 2025;
  • Another rate hike at the next meeting is possible, but it will depend on incoming economic data;
  • A rate cut this year is not the baseline scenario;
  • The FOMC is no longer forecasting a recession in the US;
  • Asset reduction (quantitative tightening – QT) will continue.

According to the FedWatch Tool, there is only a 22% chance that the US Fed will raise interest rates in September. For investors, this is a green flag for further growth of stock indices.

Equity markets in Europe were mostly down yesterday. Germany’s DAX (DE40) fell by 0.49%, France’s CAC 40 (FR40) lost 1.35%, Spain’s IBEX 35 (ES35) rose by 0.85%, and the UK’s FTSE 100 (UK100) closed negative yesterday by 0.19%.

Another drop in Germany’s leading indicator, the IFO index, confirms that the economy has returned to a downtrend. According to economists, the German economy is stuck in the zone between stagnation and recession (so-called “slow recession”) and is in dire need of a new reform program. China’s weaker-than-expected opening, the looming recession in the US and Europe, and the continued tightening of monetary policy seem to be taking their toll on German company sentiment. Germany is likely to face a longer period of subdued growth – the current valuation component is as low as it was at the end of 2020, with both the current indicators and the expectations component down.

The ECB will hold a monetary policy meeting today. Analysts expect the ECB to raise rates by 0.25%. However, the focus will be on the Central Bank’s plans for September, and markets are divided on whether there will be another rate hike or whether the ECB will hit the pause button. ECB President Christine Lagarde is likely to reiterate that future decisions will be based on incoming economic data. Last time the ECB said that inflation is projected to stay too high for too long, so given the strong labor market, there is room for the ECB to raise rates further.

The Energy Information Administration (EIA) reported yesterday a 600,000 barrel drop in US crude oil inventories. Oil prices rose in Asian trading on Thursday, recovering most of the previous session’s losses. Analysts believe that there are concerns in the oil market about the reliability of oil supplies in sufficient volume. Oil prices are therefore expected to rise in the coming months, following tensions in global markets after supply cuts by the world’s largest producers.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) was down by 0.04%, China’s FTSE China A50 (CHA50) decreased by 0.04%, Hong Kong’s Hang Seng (HK50) lost 0.36% on the day, while Australia’s S&P/ASX  00 (AU200) was positive by 0.85% on Wednesday. But most Asian stocks returned to the upside on Thursday as interest in risk-oriented markets was boosted by the Federal Reserve downplaying the likelihood of a US recession this year.

While aggressive interest rate hikes in the US appear to be nearing an end, Japan’s central bank faces a tough decision tomorrow on whether to take another step towards phasing out its controversial yield control program. Although inflation has been holding above its 2% target for more than a year, BOJ Governor Kazuo Ueda has vowed to keep monetary policy soft until he is confident the economy can withstand global headwinds and allow companies to continue raising wages next year. The BOJ is expected to keep the policy rate at minus 0.1% and maintain its yield curve control (YCC) targets at the two-day meeting that ends on Friday. However, the board may discuss making minor policy changes, such as widening the range of premiums around the 10-year yield target, if it feels the costs of YCC are starting to outweigh the benefits.

S&P 500 (F)(US500) 4,566.75 −0.71  (−0.016%)

Dow Jones (US30) 35,520.12 +82.05 (+0.23%)

DAX (DE40)  16,131.46 −80.13 (−0.49%)

FTSE 100 (UK100) 7,676.89 −14.91 (−0.19%)

USD Index  101.01 −0.34 (−0.33%)

Important events for today:
  • – Eurozone ECB Interest Rate Decision at 15:15 (GMT+3);
  • – Eurozone ECB Monetary Policy Statement at 15:15 (GMT+3);
  • – US Core Durable Goods Orders (m/m) at 15:30 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US GDP (q/q) at 15:30 (GMT+3);
  • – Eurozone ECB Press Conference at 15:45 (GMT+3);
  • – US Pending Home Sales (m/m) at 17:00 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
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