InvestMacro

The Fed is reactive in setting rates – not proactive

By Elliott Wave International

The days of near-zero interest rates are long gone — at least for now.

As we look back on 2022, we know that it’s been a year of rising interest rates, and many observers say it’s all due to the Fed.

But it’s a flat-out myth that the Fed determines the trend of interest rates. The market does. The Fed merely follows.

Here’s a chart and commentary from the December Elliott Wave Theorist, a monthly publication since 1979 which covers major financial and cultural trends:

The chart updates the Fed’s interest-rate activity since mid-2021. As you can see, the Fed’s rate changes have continued to lag rate changes in T-bills as set by the market. The Board’s decisions are not magical or even thoughtful. They look at the market rate, and they adjust the Fed Funds Rate accordingly. That’s all there is to it. That’s all there ever has been to it.

So, given that the market sets rates and the Fed follows, a key takeaway is that the Fed’s interest-rate actions produce no outcomes (for example, “stepping on the brakes” of the economy) that wouldn’t have happened through regular market forces.

Other central banks around the world also lag the market. Consider the European Union. Here’s a historical snapshot from Robert Prechter’s book, The Socionomic Theory of Finance:

The chart plots monthly data for the interest rate of the freely-traded, 3-month euro generic government bond versus the European Central Bank’s (ECB’s) main refinancing operations rate, which is Europe’s equivalent to the U.S. federal funds rate. As these graphs show, rate-setting actions by the ECB have lagged the freely traded debt market at all seven major turning points in interest rates since 1999. The lags vary from one to ten months, and the average lag is 5.3 months.

You can find the same principle at work in the United Kingdom, Australia and other global central banks.

It may be difficult for central bank watchers to latch onto the idea that markets guide central banks rather than the other way around. Yet, no data show otherwise.

The December Elliott Wave Theorist provides you with more financial insights, including warning signs about the stock market.

And, speaking of warning signs about the stock market, you may want to become familiar with the Dow Industrials’ Elliott wave pattern — which can help you to anticipate what’s next.

As Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior, notes:

The Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failures in financial affairs.

If you’d like to learn the details of the Wave Principle, here’s good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world’s largest Elliott wave educational community.

Joining Club EWI is a great way to start 2023 because all the free Elliott wave resources which accompany a Club EWI membership will help to provide you with an independent perspective on financial markets which you may not be getting from other sources.

And, by the way, a Club EWI membership itself is also free.

So, get started now by following this link: Elliott Wave Principle: Key to Market Behavior.

By JustMarkets

Investors continue to get rid of stocks before the end of the trading year. As the stock market closed Wednesday, the Dow Jones Index (US30) decreased by 1.10%, and the S&P 500 Index (US500) was down by 1.20%. The NASDAQ Technology Index (US100) fell by 1.35%. The Nasdaq (US100) fell to a two-month low as the technology downturn continues, and the S&P 500 (US500) is poised for its biggest annual loss since the 2008 financial crisis. Recession fears are highly likely to continue in the market in early 2023, but analysts believe equity markets will begin to recover in the second half of 2023.

The US Real Estate Market continues to show signs of weakness. Pending home sales fell in all regions this month. On a year-over-year basis, unfinished home sales fell by 38.60%, the largest year-over-year drop on record. Pending home sales are often seen as a leading indicator of purchases of existing homes, given that real estate contracts are usually entered into a month or two before they are sold.

Shares of Southwest Airlines (LUV) decreased by 3% after a warning that airlines continue to cancel flights due to bad weather. Shares of AAL (AAL) and DAL (DAL) were down more than 1% yesterday.

Tesla (TSLA) plans to cut production at its Shanghai plant due to an increase in the incidence of coronavirus.

Equity markets in Europe traded flat yesterday. German DAX (DE30) gained 0.32%, French CAC 40 (FR40) was 0.61% lower, Spanish IBEX 35 (ES35) decreased by 0.12%, and British FTSE 100 (UK100) gained 0.32%.

Analysts believe that the energy crisis will lead to a significant slowdown of the European economy in 2023. At the same time, real estate prices will collapse, and unemployment will rise substantially. The main risk comes from the energy crisis amid falling temperatures in winter. And suppose Europe manages to get through this winter without significant problems in the energy system. In that case, it will be possible to say with certainty that the peak of inflation is over.

The EU replaced Russian and Ukrainian steel with supplies from Taiwan and South Korea.

Oil prices fell Wednesday because of the likelihood that China’s easing of pandemic restrictions will boost demand for fuel. China said it would stop requiring quarantine for arriving travelers starting January 8, an important step toward easing strict restrictions. But falling oil inventories could bring back bullish sentiment in the oil market. A preliminary Reuters poll showed that US crude inventories fell by 1.6 million barrels last week.

Gold and silver are inversely correlated to the dollar index and US government bond yields. As monetary policy tightens, the dollar index and government bond yields go up, and gold and silver prices go down, which they have been doing for 2022. But the first signs of a slowdown in rate hikes have returned investor interest in precious metals. The US Federal Reserve will peak rates in 2023, potentially setting the stage for a new medium-term or even long-term uptrend in gold.

Asian indices traded flat yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.41%, China’s FTSE China A50 (CHA50) was down by 0.08%, India’s NIFTY 50 (IND50) lost 0.05%, Hong Kong’s Hang Seng (HK50) jumped by 1.56%, and S&P/ASX 200 (AU200) closed down by 0.3%.

Chinese energy companies began constructing a power plant with a capacity of 16 million kW in northern China. The solar and wind power project will be the largest power plant of its kind built in the desert.

S&P 500 (F) (US500) 3,783.22 −46.03 (−1.20%)

Dow Jones (US30) 32,875.71 −365.85 (−1.10%)

DAX (DE40) 13,925.60 −69.50 (−0.50%)

FTSE 100 (UK100) 7,497.19 +24.18 (+0.32%)

USD Index 104.55 +0.37 (+0.35%)

• – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+2);
• – US Crude Oil Inventories (w/w) at 18:00 (GMT+2).

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.

By JustMarkets

In the US, the Personal Consumption Price Index (PCE) rose by 0.1% last month after rising 0.4% in October. The latest data signaled that the PCE index was slowing, reinforcing expectations for a smaller interest rate hike by the Federal Reserve and improving investor appetite for risk. At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 0.53% (+0.86% for the week), and the S&P 500 Index (US500) added 0.59% (-0.23% for the week). The NASDAQ Technology Index (US100) was up 0.21% on Friday (-1.96% for the week).

Holiday sales in the US rose by 7.6% despite inflationary pressures. Consumer spending accounts for nearly 70% of US economic activity, but Americans remain resilient. But problems began to appear, as higher prices for necessities are taking a larger share of total wages. The US durable goods orders fell by 2.1% in November, compared to an expected 0.6% decline.

According to CEBR (Center for Economic and Business Research), higher borrowing costs to fight inflation will cause several economies to contract next year. The report adds that the battle against inflation is not yet won. Analysts expect central banks to stick with their stance in 2023 despite the economic costs. The price of reducing inflation to a more comfortable level is the worst growth prospect for many years. The findings are more pessimistic than the International Monetary Fund’s latest forecast. CEBR takes its baseline data from the IMF’s World Economic Outlook and uses an internal model to forecast growth, inflation, and exchange rates.

Equity markets in Europe traded flat last week. German DAX (DE30) gained 0.19% on Friday (+0.04% for the week), French CAC 40 (FR40) lost 0.20% (+0.52% for the week), Spanish IBEX 35 (ES35) was down 0.01% (+1.84% for the week), British FTSE 100 (UK100) closed on Friday up by 0.05% (+1.92% for the week).

Britain’s turbulent year is coming to an end, and there are a few signs that 2023 will be more optimistic. Signs of a painful economic downturn in the UK continue to pile up. The options market is also showing skepticism, with traders still gloomy about the long-term outlook. Opportunities for growth next year may be limited by divergent central bank policies, as the Bank of England looks increasingly dovish compared to comparable banks. In addition, the UK economy is wobbly, budget deficits are skyrocketing, and double-digit inflation has caused the steepest drop in living standards in recorded history, curbing spending and causing the worst industrial turmoil in decades. The housing market also looks vulnerable. Yield spreads between two- and 10-year swaps tied to the overnight rate, an indicator of recession risks, also point to a longer recession in the UK than in other major economies.

Oil prices rose to a three-week high on Tuesday as China’s latest easing of COVID-19 restrictions raised hopes for fuel demand, and concerns that winter storms in the United States are affecting energy production continue to support prices. Cold freezing temperatures and a heavy snowstorm on Friday left thousands of homes in the United States without power, which not only increased heating and electricity prices but also increased the death toll. Airlines canceled about 2,700 flights in the United States after weather disrupted airports across the country.

Parts of the Asian market did not trade yesterday. Japan’s Nikkei 225 (JP225) gained 0.65%, China’s FTSE China A50 (CHA50) fell by 0.45%, Hong Kong’s Hang Seng (HK50) ended Friday down by 0.44%, India’s NIFTY 50 (IND50) rose by 1.17%, and Australia’s S&P/ASX 200 (AU200) ended the day down by 0.63%.

On Monday, Bank of Japan (BOJ) Governor Haruhiko Kuroda denied the possibility of a short-term exit from the super-soft monetary policy but expressed hope that the growing labor shortage will force firms to raise wages. Kuroda said the Bank of Japan’s decision last week to widen the permissible range around its yield target was aimed at boosting the effect of its super-soft policy, not a first step toward canceling a massive stimulus program. The BoJ will aim for sustained and stable price targets accompanied by wage increases while continuing to ease monetary policy under yield curve control.

China sent 71 warplanes and 7 ships toward Taiwan. Of these, 43 planes also crossed the middle line of the Taiwan Strait, an unofficial buffer zone between the two sides. Taiwan’s official Central News Agency said it was the largest incursion by the Chinese Air Force to date. The White House said the United States was concerned about Chinese military activity near Taiwan, which it called “provocative” and “destabilizing,” adding that it could lead to miscalculation and undermine regional stability. China, for its part, is showing strength in response to the US defense bill, which authorizes increased security cooperation with Taiwan.

China infected 248 million people with COVID-19 in December. And last week, a new daily infection record was set, with 37 million Chinese infected in 24 hours. But despite such a surge in illness, Beijing and Shanghai returned to work on Monday. China raised its estimate of gross domestic product (GDP) growth in 2021 to 8.4% from 8.1% previously, the National Bureau of Statistics said Tuesday.

In the commodities market, futures on gasoline (+11.24%), WTI crude (+6.57%), cocoa (+6.55%), BRENT oil (+6.24%), sugar (+4.53%), coffee (+4.5%), cotton (+3.93%), platinum (+3.09%), wheat (+2.79%) and palladium (+2.69%) showed the biggest gains by the end of the week. Futures on natural gas futures (-24.02%) and orange juice futures (-3.35%) showed the biggest drop.

S&P 500 (F) (US500) 3,844.82 +22.43 (+0.59%)

Dow Jones (US30) 33,203.93 +176.44 (+0.53%)

DAX (DE40) 13,940.93 +26.86 (+0.19%)

FTSE 100 (UK100) 7,473.01 +3.73 (+0.050%)

USD Index 104.33 -0.11 (-0.10%)

• – Japan Unemployment Rate (m/m) at 01:30 (GMT+2);
• – Japan Retail Sales (m/m) at 01:30 (GMT+2).

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.

By ForexTime

Stock markets are gaining while the US dollar is softening after China announced it would drop its quarantine requirements for inbound visitors. This further eases three-year border controls aimed at curbing Covid-19.

The authorities also downgraded the seriousness of the virus as it gradually evolves into a common respiratory infection. The latest policy moves from China indicated that economic activity in most major cities may return to normal very quickly which is positive for investors.

Asia-Pacific stocks are in the green while the aussie is the standout currency major. Some markets including in Hong Kong and Australia remain closed on Tuesday.

US stocks futures are showing decent gains with markets in holiday mode with thin volumes and liquidity.

Wall Street had closed higher on Friday with the benchmark S&P500 ending 0.6% higher but Friday’s gains were not enough to stop both the benchmark broader index and the tech-heavy Nasdaq closing lower for a third week in a row.

That is the first such losing streak since September and with four days of trading left this year, sees the S&P500 and Nasdaq losing around 20% and 33% respectively, which is the worst performance since the GFC 2008 crisis.

Article by ForexTime

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

By JustMarkets

In the US, higher-than-expected Gross Domestic Product (GDP) growth of 3.2% in the third quarter – compared to forecasts of 2.9% growth – has returned fears of an interest rate hike to the market. This led to a strengthening of the dollar index and a selloff in the stock market. As the stock market closed, the Dow Jones Index (US30) decreased by 1.05%, and the S&P 500 Index (US500) lost 1.45%. The Technology Index NASDAQ (US100) closed the day at minus 2.18%.

Strong economic data may force the Federal Reserve back to a more hawkish mood. The Fed is especially concerned that a strong labor market gives more oxygen to inflation, which has declined slightly in recent months but is still at its highest level in decades. Therefore, the Fed may have to continue raising interest rates and keep them high for a long time.

Shares of Micron Technology Inc (MU) fell more than 3% after posting quarterly results that didn’t meet expectations. The gloomy macroeconomic backdrop continues to weigh on demand. Deutsche Bank estimates there is a risk of further declines as Micron estimates point to a recovery in demand by mid-2023.

Equity markets in Europe mostly fell yesterday. Germany’s DAX (DE30) decreased by 1.30%, France’s CAC 40 (FR40) lost 0.95%, Spain’s IBEX 35 (ES35) fell by 0.39%, and the British FTSE 100 (UK100) closed Thursday down by 0.37%.

ECB spokesman Luis De Guindos said yesterday that inflation in the Eurozone would be around current levels for the next 2-3 months. This coincides with other comments from ECB policymakers. In addition, de Guindos supported the hawkish stance, saying that 50 bps is now the new standard for suppressing rising inflationary pressures in the Eurozone. The ECB is expected to raise interest rates twice more with a 0.5% step.

China reiterated its focus on boosting economic growth in 2023, which helped revise the impact of crude oil demand upward. China, the world’s largest consumer and importer of crude oil, naturally influences the overall price depending on the state of the economy. Increasing demand for oil with limited supply will drive up oil prices.

Asian markets mostly rose yesterday. Japan’s Nikkei 225 (JP225) gained 0.46%, China’s FTSE China A50 (CHA50) added 0.69%, Hong Kong’s Hang Seng (HK50) increased by 2.71%, India’s NIFTY 50 (IND50) was down by 0.39%, and Australia’s S&P/ASX 200 (AU200) was up 0.53% on the day.

In Japan, inflation data showed that consumer prices (excluding food energy prices) rose from 3.6% to 3.7% year-over-year, the highest since 1981. The Bank of Japan expects inflation to peak around 4% early next year. After the Bank of Japan’s shocking decision this week to let bond yields rise, higher inflation will support speculation that the central bank is nearing a policy reversal. A policy change could come in the spring of 2023 after a new governor takes the helm of the Central Bank.

S&P 500 (F) (US500) 3,822.39 −56.05 (−1.45%)

Dow Jones (US30) 33,027.49 −348.99 (−1.05%)

DAX (DE40) 13,914.07 −183.75 (−1.30%)

FTSE 100 (UK100) 7,469.28 −28.04 (−0.37%)

USD Index 104.43 +0.27 (+0.26%)

• – Japan National Core CPI (m/m) at 01:30 (GMT+2);
• – Japan Monetary Policy Meeting Minutes at 01:50 (GMT+2);
• – Singapore Consumer Price Index (m/m) at 07:00 (GMT+2);
• – US Core Durable Goods Orders (m/m) at 15:30 (GMT+2);
• – US PCE Price index (m/m) at 15:30 (GMT+2);
• – Canada GDP (m/m) at 15:30 (GMT+2);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+2);
• – US New Home Sales (m/m) at 17:00 (GMT+2).

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.

By ForexTime

The week following the Christmas weekend features sparse economic data releases and events, as markets wind down 2022.

As much of the western world continues revelling in the festivities, markets may adopt a more Asian-centric focus over the coming week:

Monday, December 26

• JPY: BOJ Governor Haruhiko Kuroda speech
• US, UK, and European markets closed

Tuesday, December 27

• CNH: China November industrial profits
• JPY: Japan November retail sales, jobless rate
• UK markets closed

Wednesday, December 28

• JPY: Bank of Japan summary of opinions, Japan November industrial production

Thursday, December 29

• EUR: ECB releases Economic Bulletin
• USD: US weekly initial jobless claims

Friday, December 30

• US bond market closes early

The Japanese Yen could receive special attention, in light of the recent stunner by the Bank of Japan.

In case you missed it, on December 20th, the BoJ unexpectedly widened the band on 10-year yields, which also doubled the ceiling from 0.25% to 0.50%.

The Japanese Yen soared alongside the surge in yields, with markets now believing that this week’s policy tweak paves the way for an eventual rate hike by the Bank of Japan in 2023.

Following the recent policy shocker, Governor Haruhiko Kuroda harped on the idea that the tweak to the BoJ’s yield curve control programme was not a rate hike.

Yet, markets believe otherwise.

At the time of writing, markets are forecasting 4 rate hikes by the BoJ in 2023, with the first perhaps to be triggered in April, when Kuroda steps down as the central bank governor.

READ MORE: Why is the Japanese Yen soaring?

Such expectations will frame BoJ Governor Haruhiko Kuroda’s speech on Monday.

If Kuroda lets slip more hawkish policy clues, that may translate into JPY strength before this calendar year is over.

And the JPY could push higher if the following economic data out of Japan over the coming week also point to some resilience in the Japanese economy, which would lower the bar for BoJ rate hikes in 2023.

2 reasons for the Yen’s pullback today (Friday, Dec 23)

1. Japan’s (slightly) lower-than-expected November inflation

   Japan’s National consumer price index (CPI) released earlier today (Friday, Dec 23) came in at 3.8% for November, a touch below market forecasts of 3.9%.

   That is casting slight doubts on whether Japan’s inflation is problematic enough to warrant a BoJ rate hike, with such doubts perhaps prompting the paring of JPY’s gains against all of its G10 peers.

   Yet, that 3.8% headline inflation figure is still rising at its fastest pace since 1981.

   That suggests that the BoJ would ultimately have to make a pivot away from its ultra-dovish stance, having kept its benchmark rate unchanged at negative 0.1% all of this year. That’s in stark contrast to its global peers have been hiking aggressively to combat the inflation scourge.

2. Recovery from “oversold” conditions

   USDJPY’s 14-day relative strength index has recently bounced off the 30 threshold which denotes ‘oversold’ conditions (this currency pair fell too far too fast).

   However, once the froth has been cleared, it could pave the way for further declines for USDJPY.

Potential technical catalyst for further USDJPY declines

At the time of writing, note how this currency pair’s shorter-term 21-day simple moving average (SMA) is just pips away from dropping below its longer-term, 200-day counterpart.

Such a bearish technical event may send USDJPY even lower.

However, USDJPY bears must first overcome a key support region around the 131.0 mark, which helped shored up this FX pair back in August, while also serving as a crucial resistance level back in April/May.

Hence, this coming week’s combo of:

• fundamental factors: Kuroda speech, Japan economic data
• technical factors: bearish cross?

 … may combine to force USDJPY even lower over the coming week and set the tone for USDJPY in 2023, especially given market expectations for the eventual BoJ rate hike(s).

Article by ForexTime

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

By JustMarkets

In the United States, the Conference Board consumer confidence indicator jumped to 108.3 from 101.4, beating economists’ forecast of 101.0. Data showing strong consumer sentiment, a key gauge of consumer spending that drives economic growth, eased fears of a recession, leading stock indices to rise. As the stock market closed, the Dow Jones Index (US30) increased by 1.60%, and the S&P 500 Index (US500) added 1.49%. The Technology Index NASDAQ (US100) closed up by 1.54%.

The improvement in both the current and expectations indices can be attributed to a favorable consumer outlook on the economy and jobs, while inflation expectations reached their lowest level since September 2021. Housing data, on the other hand, did not make investors happy. Existing home sales fell by 7.7% over the past month, indicating serious problems in the real estate sector.

FedEx Corporation (FDX) reported better-than-expected quarterly results and announced plans to cut spending by another $1 billion.

Canadian retail sales were down 0.5% in November. Statistics Canada has indicated that this is a preliminary estimate that may be subject to revision. Also, in Canada, new inflation data was released yesterday. The report showed that year-over-year consumer prices fell from 6.9% to 6.8%, while core inflation (which excludes food and energy prices) remained at 5.8% y/y. The concern for the Bank of Canada continues to be rising food prices, indicating that inflation is taking root, with core inflation remaining well above the target. The Bank of Canada and the US Federal Reserve are set for some policy divergence. The Fed intends to continue raising rates through 2023, while the Bank of Canada has given a more dovish outlook, citing fears of a recession.

Equity markets in Europe mostly rose yesterday. Germany’s DAX (DE30) gained 1.54%, France’s CAC 40 (FR40) jumped by 2.01%, Spain’s IBEX 35 (ES35) added 1.43%, Britain’s FTSE 100 (UK100) closed by 1.72% higher on Wednesday.

ECB spokesman Centeno said yesterday that the central bank expects Eurozone inflation to peak in the fourth quarter of 2022.

In the UK, according to the latest CBI monthly distribution survey, retailers reported an unexpected rebound in sales growth. The UK government’s decision to freeze business rates starting in April gave welcome relief to the retail sector. But retailers also need to see long-term sustainable growth measures from the government to spur investment and address ongoing labor shortages. Firms are not expecting much of a New Year’s mood, as they plan for sales to decline again after the New Year holidays.

Crude oil prices rose for the third straight day as China, the largest oil importer, continues to loosen measures. Oil prices also rose after US crude inventories fell three times last week as demand for the fuel increased due to more travel as well as holiday parcel delivery activity by truckers. US West Texas Intermediate (WTI) crude for February delivery rose by 2.7% to $78.29 a barrel. Brent Crude oil (BRENT) of British origin for February delivery rose by 2.8% to $82.20 per barrel.

The impact of sanctions on Russian crude oil remains a very important issue that still needs to be fully resolved. The EU and their G7 partners have imposed a ban on Russian crude oil since December 5, 2022. This means that the UK will ban the import, purchase, supply, and delivery of Russian oil and oil products to the UK. This ban will potentially hit the price of British Brent Crude and possibly make it more expensive in the long term due to the lack of supply.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.68%, China’s FTSE China A50 (CHA50) increased by 0.50%, Hong Kong’s Hang Seng (HK50) added 0.34%, India’s NIFTY 50 (IND50) lost 1.01%, and Australia’s S&P/ASX 200 (AU200) was up 1.29% by the end of Wednesday.

Interest rate hikes in the US and other advanced economies have weighed heavily on Asian currencies this year as the gap between risky and low-risk debt narrowed. While the Bank of Japan’s decision brought some relief to regional currencies this week, it also signaled that Japan’s central bank is likely to tighten policy next year.

S&P 500 (F) (US500) 3,878.44 +56.82 (+1.49%)

Dow Jones (US30) 33,376.48 +526.74 (+1.60%)

DAX (DE40) 14,097.82 +213.16 (+1.54%)

FTSE 100 (UK100) 7,497.32 +126.70 (+1.72%)

USD Index 104.20 +0.24 (+0.23%)

• – UK GDP (q/q) at 09:00 (GMT+2);
• – US GDP (q/q) at 15:30 (GMT+2);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+2).

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.

By Arabinda Basistha, West Virginia University 

The rate at which Americans are saving money has dipped close to an all-time low, according to the Bureau of Economic Analysis. The personal savings rate was 2.3% as of October, down from 7.3% a year earlier. It’s the lowest since July 2005, when the rate hit a record low of 2.1%.

We asked Arabinda Basistha, an economist at West Virginia University, to explain the personal savings rate, what’s driving it so low and what it means as a potential recession looms in 2023.

What is the personal savings rate?

The personal savings rate measures how much of Americans’ after-tax, or disposable, income is left over after spending on bills, food, debt and everything else. Calculated and reported by the U.S. Bureau of Economic Analysis, it is an important component of the financial security of American families.

The latest data shows Americans are saving just 2.3%, or US$2.30 of every $100 they earn after paying taxes, down from 7.5% as recently as December 2021. Historically, that’s very low.

From 2015 to 2019, for example, this rate averaged around 7.6%. It rose dramatically during the COVID-19 shutdown in early 2020, to a record high of 33.8%. With restaurants, entertainment venues and almost everything else closed, Americans had fewer things to spend money on.

That’s changed as economies have opened up and people eager to travel and dine out have begun to spend the money they had saved.

Will the savings rate decline continue?

American consumers usually do not change their consumption and saving behavior dramatically.

So to understand this decline, it’s important to add some historical context.

The last time the savings rate fell this low, in 2005, it was part of a trend that lasted several years. From 1998 to 2004, rates averaged about 5.4%, slipping to 3.3% from 2005 to 2007. Thus the 2.1% rate recorded in July 2005 should be seen as part of a low-savings rate phase.

In recent years, Americans have been saving more of their disposable income. The savings rate averaged nearly 9% in 2019 just before the pandemic stifled spending. This led to the massive swing upward in savings.

An October 2022 study by the Federal Reserve found that U.S. households accumulated $2.3 trillion during the pandemic, thanks in part to about $1.5 trillion in direct fiscal support.

Rates swung again in the other direction, as consumer spending has surged and people use up those excess savings. Against this backdrop, I believe it is quite unlikely that the current low rates will continue for long, as consumers adjust back to pre-2020 patterns.

What does the drop in savings signal about the state of Americans’ finances?

While the savings rate is important, it doesn’t give us the full picture of Americans’ financial health. Moreover, one should not put too much importance on a single set of recent data, as future revisions can be large.

A few other measures are necessary to assess the state of household finances.

First, current delinquency rates – the share of all loans that are past due for at least 30 days – are at just 1.2%, the lowest since at least the 1980s. The rate is 1.9% for consumer loans and 2.1% for credit cards. Both rates have increased since 2021 but are still historically low.

The low rates are partly due to the pandemic forbearance programs and fiscal support, but still show Americans are in pretty good shape financially.

Another metric worth looking at is the household debt to gross domestic product ratio. This measures the debt burden of U.S. households relative to the size of the economy. The latest data from June 2022 shows the ratio at 76%, which is near the lowest in about two decades. Ahead of the 2007-2009 recession, the ratio was significantly higher, at about 100%.

A third measure of Americans’ financial health is the share of disposable income spent on payments for mortgages and other debts. U.S. households spent about 9.6% of their incomes servicing debts in the second quarter of 2022, well below the 12.8% average from 2005 to 2007.

So if there’s a recession in 2023, does this mean Americans will be ready for it?

Adding all this information together, household finances look quite stable and able to withstand moderate economic risks to the U.S. economy.

This is not to argue that a persistently low savings rate will not be an issue in the future. If the savings rate remains low for another year, it will weaken household financial positions.

About the Author:

Arabinda Basistha, Associate Professor of Economics, West Virginia University

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

By JustMarkets

The Bank of Japan alarmed investors yesterday after it announced it would allow Japan’s 10-year government bond yields to rise 50 basis points or 0.5%. That’s above the previous limit of 25 basis points and signals the Bank of Japan’s first move to tighten monetary policy by expanding its target range for bond yields. This is a forced measure of policy tightening due to a lack of demand and liquidity in the country’s debt market, as well as capital outflows from Japan. Japan’s rising government bond yields led to rising global bond yields, including Treasuries, which in turn led to falling indices. Nevertheless, the growth of energy companies’ shares due to a jump in oil prices helped stabilize the stock market as a whole. At the close of the stock exchange, the Dow Jones Index (US30) gained 0.28%, and the S&P 500 Index (US500) added 0.10%. The Technology Index NASDAQ (US100) closed at its opening level.

In the US, housing construction exceeded expectations in November. Still, the number of permits, an indicator of future project activity, fell to an 18-month low, adding to fears of further activity decline.

European stock markets traded flat yesterday. Germany’s DAX (DE30) decreased by 0.42%, France’s CAC 40 (FR40) lost 0.35%, Spain’s IBEX 35 (ES35) added 0.59%, and the British FTSE 100 (UK100) closed Tuesday at plus 0.13%.

European stocks fell on Tuesday due to rate-sensitive tech and industrial stocks after the Bank of Japan (BOJ) shocked global markets with a surprise policy change. While this was a minor policy adjustment, it was the first adjustment by the BOJ in a very long time. That’s why the market reaction has been substantial.

Gold and silver continue to rise amid a decline in US government bonds. Gold has an inverse correlation to the dollar index and government bonds, and that’s why the “yellow metal” was falling against a background of tighter monetary policy from the Fed. But now the Fed is getting closer to the end of the cycle, so more and more investors are moving into gold amid the approaching recession.

Oil prices ended higher Tuesday as a worsening forecast for a major storm in the US raised fears that millions of Americans could limit their travel plans during the New Year holiday. Oil prices were supported by a weaker dollar and a US oil restocking plan, but gains were limited by uncertainty over the rising number of COVID-19 cases in China.

TC Energy Corp. submitted its plan to US regulators to restart the Keystone pipeline nearly two weeks after the pipeline rupture that led to the largest oil spill in the United States in nine years.

Asian markets were mostly down yesterday. Japan’s Nikkei 225м(JP225) decreased by 2.46%, China’s FTSE China A50 (CHA50) lost 2.41%, Hong Kong’s Hang Seng (HK50) ended the day down by 1.33%, India’s NIFTY 50 (IND50) fell by 0.19%, and Australia’s S&P/ASX 200 (AU200) ended Tuesday down by 1.54%.

Tighter Bank of Japan policy will remove one of the last global anchors that helped keep borrowing costs low more broadly. Many economists now expect the Bank of Japan to raise interest rates next year, joining the Fed, ECB, and others after a decade of extraordinary stimulus.

S&P 500 (F) (US500) 3,821.62 +3.96 (+0.10%)

Dow Jones (US30) 32,849.74 +92.20 (+0.28%)

DAX (DE40) 13,884.66 −58.21 (−0.42%)

FTSE 100 (UK100) 7,370.62 +9.31 (+0.13%)

USD Index 104.00 -0.72 (-0.68%)

• – Canada Consumer Price Index (m/m) at 15:30 (GMT+2);
• – US CB Consumer Confidence (m/m) at 17:00 (GMT+2);
• – US Existing Home Sales (m/m) at 17:00 (GMT+2);
• – US Crude Oil Reserves (w/w) at 17:30 (GMT+2).

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.