Archive for Economics & Fundamentals – Page 125

20 Dec

What’s program-related investment? A management scholar explains one way that foundations support charities without giving money away for good

By Jessica Jones, University of Tennessee 

Most U.S. foundations seek to preserve the money that funds their grants and operations for the long term. They accomplish this by not giving away more money than they earn as returns on the assets held in their endowments.

By law, foundations must give away or spend on their operations a total of at least 5% of what they hold in endowments every year. In practice, foundations spend more than that on their total grants and expenses – around 8% of their assets in 2018, for example.

One way that foundations can stretch their charitable dollars is by making program-related investments – a philanthropic form of lending. Instead of giving money away, those funds are typically repaid several years later. With this model, foundations can recycle some of their charitable funds by dispatching them again.

The investments may count toward that 5% payout minimum and must, in the IRS’ words, “significantly further the foundation’s exempt activities.”

That means a foundation’s program-related investments, like the money it gives away as grants, must support work that’s in keeping with its charitable goals. Foundations can accomplish this by supporting, for instance, affordable housing, backing cancer research efforts or supporting efforts that are a part of their IRS-authorized mission.

Foundations may also use program-related investments to financially back either nonprofits or for-profit social organizations, also known as social enterprises.

Below-market rates

By injecting funds into organizations that would perhaps otherwise be deemed too risky to attract investment, foundations may use some of their assets as a catalyst that can speed up innovation tied to a cause they support through their grants.

The foundations are free to charge any interest rate they see fit, but must be below-market on a risk-adjusted basis. This keeps the program-related investments focused on the charitable mission rather than the opportunity for gaining a high return on their investment.

Program-related investments are most appropriate for organizations that private investors are unlikely to back due to high risks or expectations of limited financial returns, such as small businesses in low-income neighborhoods.

While program-related investments are intended to be repaid and provide heightened accountability for allocating charitable dollars for both the foundation and its recipient, there are no formal penalties if the money is not repaid. This is because the alternative would have been in the form of a grant, where the money was given with no expectation of repayment in the first place.

Why program-related investments matter

Foundations and other large philanthropic institutions have long faced pressure to do more with their money to advance the causes they support.

As of late 2022, U.S. foundations held a total of more than US$1.1 trillion in their endowments and had relegated some of those assets to program-related investments.

Although this practice was established following passage of a comprehensive tax reform package in 1969, relatively few of the nation’s nearly 130,000 foundations have embraced it.

But many of the largest ones, such as the Rockefeller, MacArthur and Bill and Melinda Gates foundations, do regularly make program-related investments to advance their missions.The Conversation

About the Author:

Jessica Jones, Assistant Professor of Management & Entrepreneurship, University of Tennessee

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

 

Economics & Fundamentals Financial News
20 Dec

Did Jerome Powell Just Steal Christmas?

Source: Michael Ballanger  (12/19/22) 

 Expert Michael Ballanger looks at the S&P 500, the current state of gold and silver, and some resource companies, including Getchell Gold. Ballanger also touches on Powell’s anti-inflation campaign and tells you his 2023 outlook.

Last Tuesday afternoon, there was an attempted theft of untold magnitude and unimaginable loss; the chairman of the U.S. Federal Reserve Board attempted to make off with what was shaping up to be a powerful year-end rally, commonly referred to as “The Santa Claus Rally” (SCR).

S&P 500

Citing easing financial conditions as represented by the 17.5% rally of the October 13th lows in the S&P 500, the Fed jacked rates up by another 50 basis points to 4.4%. Still, it was the hawkish rhetoric spewed out during the 2:30 presser that aged like a toxic brew overnight, with the following three sessions shaving roughly 6% from the move.

As this is being written (Friday pre-opening), futures are called another 1% lower. Investors have been snapped to attention by a particularly Grinch-like central banker that would rather see a million lost jobs over a 7% inflation rate, especially when his “legacy before charity” is the seasonal policy of choice.

Wall Street cheerleaders are still calling for a face-ripping rally to 4,500 before the next real onslaught of selling but after the events of last Tuesday, their optimism is being put to a test of immense proportion.

What Mr. Powell surely realizes is the madness behind his intention to impersonate Paul Volcker, given that the size of the U.S. national debt is trillions greater in 2022 than in 1980 and that the cost of servicing that debt has grown commensurately.

With demographics clearly, worlds apart in 2022 from the impact of Babyboomers in the 1980s, if these Fed rate hikes continue to choke off growth (and jobs), the tax receipts normally collected due to increased employment and surging stock markets will quickly and fatally reverse exerting even greater pressure on debt serviceability and financial stability.

The outlook for financial conditions is, at best uncertain as we approach 2023, and markets abhor uncertainty the same way the Grinch abhorred Christmas . . .

From a technical perspective, the advance stopped right where it should have, punctuated by a downtrend line connecting peaks in late 2021, April, and August of 2022, and now the December peak at 4,100.

Wall Street cheerleaders are still calling for a face-ripping rally to 4,500 before the next real onslaught of selling but after the events of last Tuesday, their optimism is being put to a test of immense proportion.

I took profits on the UPRO:US position in two tranches, the first at a predetermined US$40 and then on a protective stop at US$38.95. I currently have a small call option position on the UPRO:US on the assumption that the Santa Claus Rally, scheduled to commence on Monday, will actually materialize as seasonality wins out over Fed jawboning.

Since the first half of December typically includes selling pressure brought about by year-end distributions from the funds, I expect to see diminished selling pressure next week with the possibility of a more pronounced uptick into New Year’s Day.

Gold and Silver

Gold for February delivery clawed its way back above US$1,800/ounce after getting bombed back to US$1,785 on Thursday. I am long a small trading position in the GLD January US$165 calls looking for US$175 by expiry, which translates into a test of the upper resistance band for February gold at US$1,875.

Silver is also acting well, coming off an overbought condition (RSI at 78.49) and a price peak at US$24.39 on Tuesday morning just prior to the FOMC shenanigans.

The gold mining stocks represented by the HUI have been in a downtrend since August 2020, peaking at around 373 and troughing out last summer at around 173 and currently residing at around 221. That is a big correction in any market, and to think that it has been inconsequential for the junior developers and explorers verges on the inane.

The VanEck Junior Gold Miner ETF (GDXJ:US) topped in August 2020 just shy of US$64.00 and today resides at US$35.18. The TSX Venture Exchange topped in August 2020 at a tad above 1,100 and today sits at 576.26.

Many of the high-flying juniors from the first half of the year with new, exciting discoveries have had their wings clipped, and no better example than MAX Resource Corp. (MAX:TSX.V; MXROF:OTCBB) whose Cesar project in Columbia drove its price to CA$0.90 before lethargy set in during the fourth quarter sending the stock to less than a third of that today.

Every gold bull has their personal and very private “penny dreadful” tucked away beside or beneath their physical gold and silver and Newmont and Barrick positions if for no other reason than to sprinkle some comic relief on the task of managing their precious metals portfolios.

I, too, have the bulk of my holdings in physical gold and silver held on my property (right next to my 30-odd-six and 357 Magnum), but I have an equal number of “dreadfuls” where the leverage to a rising gold price is immense (as long as you pick the right ones).

Alas, here is where the opportunity-cost “rubber” meets the risk-management “road” and where “glass-half-full” optimists like me get into trouble. The more I keep chirping about “market cap per ounce,” the more the eyes of the Millennial and Gen-X portfolio managers glaze over.

Valuation is irrelevant in a world governed by pattern-recognition technology, and if they buy shares in a junior and news is released that should carry it higher but doesn’t, “to hell with the Babyboomer metric that says Nevada in-ground ounces should be booked at US$75 or US$100 per ounce; it trades at US$18.42 per ounce and looks lower . . . ” and down she goes.

I went through a similar exercise in late 2015 with gold at the US$1,050 level and sentiment scraping the basement and as I was telling the world that gold was officially “on-sale,” most investment firm “analysts” were reciting the bullion bank party line chapter-and-verse and trying to engineer a sub-US$1,000 gold price in the same manner in which the kiddies over at TD Bank recently opened up a “tactical short” on silver in the US$18-plus range only to get stopped out for a 14% “tactical loss” on the trade.

What we really want to know is the number of TD hedge book clients that covered short silver positions into sell-side volume created by that very public display of bearishness. The same thing happened in 2015 as every bank in existence was negative on gold until mid-December when the COT report showed that the Commercial traders (bullion banks) had actually gone net long gold futures for the first time in decades after being net short for the better part of the 21st Century.

You have all read my plagiarism of my newsletter hero, Richard Russell (“Dow Theory Letters”), over the years but the one thing he left me with as he departed this world in 2015 was “Follow the Money.”

You have all read my plagiarism of my newsletter hero, Richard Russell (“Dow Theory Letters”), over the years but the one thing he left me with as he departed this world in 2015 was “Follow the Money.”

Back in the day, the bucket shops that pumped juniors had their “trading desks” backed by partners’ capital that would make sure that their underwritings would go out “oversubscribed,” and how they did that was make sure that the issue was “premium bid” as the deal was being marketed to clients. It was “standard operating procedure” for Foo-Foo Mines Inc. to be a US$0.50 bid as their US$0.40 private placement was being pitched to customers and that was all thanks to “the desk.”

In today’s world, such obvious stock price manipulation would never be tolerated, but I can tell you that a lot of exploration funding was successfully closed back then thanks to the efforts of “the desk.” You see, rules designed by the “WOKE” generation may have virtue at heart but most of the time, it is simply make-work programs for rules-based, anal-retentive Millennials that need justification for their own private versions of corporate correctness.

The plight of junior gold developers is one that grates on my nerves and that is entirely understandable because the biggest passes I have had in my nigh-on seven decades on the planet have come at the helm of resource discoveries. Having lost millions of dollars due to blind optimism and misplaced loyalties, I have made an even greater amount than that due to the blessings of Mother Nature and Lady Luck, the two Devine Deities of the World of Mineral Exploration.

Getchell Gold Corp.

To wit, knowing the extreme difficulties in identifying a sound project worthy of my speculative dollars, I do not tread lightly in the catacombs of due diligence, nor do I take anything for granted. No better example of that resides in my undying faith in Getchell Gold Corp. (GTCH:CSE; GGLDF:OTCQB), whose Maiden Resource Estimate was announced Friday with a global resource of 2,059,900 ounces of gold located in arguably the best mining jurisdiction in the world.

Having invested my first centablo in 2017, Getchell’s Fondaway Canyon Property has metamorphosed into a beast of a project due in no small degree to the intuitive work of geologist and President Mike Sieb and Vice-President of Exploration Scott Frostad.

Prior to the acquisition of Fondaway Canyon by Getchell in 2019, it was seen as a “marginal project” with low-grade ore at depths prohibitive to open-pit mining and grades prohibitive to underground mining.

That narrative was exacerbated and enforced by the vendors (Canarc Resource Corp. (CCM:TSX; CRCUF:OTC) et al.) and considered the “insider’s view” by many of the newsletter writers that love to pick scabs from projects outside of their personal portfolios which explains the lack of coverage by the newsletters which affects the investment bankers because their institutional clients need to know that retail interest will provide them with adequate liquidity when they elect to sell the shares and ride the warrants usually attached to these until financings.

That was a convenient excuse to blow off inquiries into Getchell and the Fondaway asset but once Sieb and Frosted began to chip away at that flawed narrative through skillful interpretation of the myriad of data that had to be digitized (during the pandemic shutdown in 2020), the resultant drill results began to arrive with impressive widths and grades that blew away any need for the word “marginal” in referring to Fondaway.

Intercepts such as 25 meters of 10.4 g/t Au in brand new zones such as North Fork and Colorado SW started to seriously redefine the Fondaway asset. As this is being written, they are now 43101-compliant on their first Maiden Resource Estimate, which incorporates all data not included in the 2017 43101 report and doubles the resource while at the same time awaiting the results of five holes drilled after the cut-off point for the engineers’ assessment of the data.

With Fondaway now open along strike and to depth, I see this eventually morphing into a “Tier One Asset” (5 million ounces or greater), and if I am correct in my forecast of US$2,250/ounce gold in the first half of 2023, valuation per ounce could be quite easily pegged in the US$200-300 per ounce levels for in-ground ounces in favorable jurisdictions such as Nevada.

In case you are wondering if I have a “hidden agenda” in devoting so much of this week’s missive on one junior name, the answer is “Yes, I do,” but once divulged, it moves from “hidden” to “admitted” (something Kevin O’Leary might wish to practice). My “agenda” is two-fold: a) to introduce this undervalued asset to some prospective new investors and b) to attract new subscribers to my service.

As to disclosure, I also own a ton of shares, so coupled with the other reasons given, call it a “shameless book pump” if you wish, but it does not alter the opportunity that I believe resides in this name.

Powell’s Anti-Inflation Campaign

Next week is the last week before Christmas, and as it usually takes me a solid two weeks to finalize the GGMA 2023 Forecast Issue, there will be no more missives until the end of the first week of January. This is going to be a very daunting exercise in attempting to lay out a course of investment actions to be taken in 2023.

It was a veritable “walk in the park” last year because we were coming out of two years of monetary and fiscal madness and long overdue for a comeuppance of sorts, which we got in spades and continue to get as the inflation monster dominates central bank policies around the globe.

I leave you all today with the notion that if there is one glaring difference between the anti-inflation campaign of Paul Volcker in 1980-82 and the one being orchestrated by Jay Powell, it lies in the differences in the sizes of the national debt.

My suspicion is that 2023 will be a better year — how could it be any worse? — and that a resurgence in global demand will create sharp price movements in the electrification metals such as copper, lead, cobalt, and nickel while sovereign debt worries keep the precious metals “bid” well into the decade.

I leave you all today with the notion that if there is one glaring difference between the anti-inflation campaign of Paul Volcker in 1980-82 and the one being orchestrated by Jay Powell, it lies in the differences in the sizes of the national debt. In 1980, the Federal debt in the U.S. was around US$900 billion, with the U.S. the world’s largest creditor nation, while in 2022, the national debt is US$31.28 trillion, with the U.S. the world’s largest debtor nation.

Since the U.S. military is a policeman to the Western World, you cannot send the nation with the global reserve currency into fits of insolvency with escalating debt service costs crippling the economy and, with it, the war machine.

There was a superb exchange back in the election campaign of 1988 during the vice-presidential debate when Senator Lloyd Bentsen took exception to Dan Quayle’s attempt to frame himself as being “more experienced than Jack Kennedy” by saying, “Senator, I served with Jack Kennedy; I knew Jack Kennedy; Jack Kennedy was a friend of mine. YOU, Sir, are NO JACK KENNEDY.” Well, here in 2022, soon-to-be 2023, I would say to Jerome Powell: “I survived the Volcker Recession of 1981-1982 with interest rates at 16.5%. YOU, SIR, are NO PAUL VOLCKER.”

With debt levels off the charts, it is either grow or die. Powell knows this all too well . . .

 

Michael Ballanger Disclaimer:

This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

Disclosures:

1) Michael J. Ballanger: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: All. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: My company, Bonaventure Explorations Ltd., has a consulting relationship with: None.

2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. As of the date of this article, an affiliate of Streetwise Reports has a consulting relationship with Western Uranium & Vanadium Corp. Please click here for more information.

3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.

4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Getchell Gold Corp., a company mentioned in this article.

Economics & Fundamentals Opinions
19 Dec

Inflation, unemployment, the housing crisis and a possible recession: Two economists forecast what’s ahead in 2023

By D. Brian Blank, Mississippi State University and Rodney Ramcharan, University of Southern California 

With the current U.S. inflation rate at 7.1%, interest rates rising and housing costs up, many Americans are wondering if a recession is looming.

Two economists discussed that and more in a recent wide-ranging and exclusive interview for The Conversation.
Brian Blank is a finance professor at Mississippi State University who specializes in the study of corporations and how they respond to economic downturns. Rodney Ramcharan is an economist at the University of Southern California who previously held posts with the Federal Reserve and the International Monetary Fund.

Both were interviewed by Bryan Keogh, deputy managing editor and senior editor of economy and business for The Conversation.

Below are some highlights from the discussion. Answers have been edited for brevity and clarity.

Brian Blank and Rodney Ramcharan talk about the economic outlook for 2023.

Are we headed for a recession in 2023?

Brian Blank: The consensus view among most forecasters is that there is a recession coming at some point, maybe in the middle of next year. I’m a little bit more optimistic than that consensus.

People have been calling for a recession for months now, and this seems to be the most anticipated recession on record. I think that it could still be a ways off. Consumer balance sheets are still relatively strong, stronger than we’ve seen them for most periods.

I think that the labor market is going to remain hotter than people have expected. Right now, over the last eight months, the labor market has added more jobs than anticipated, which is one of the strongest streaks on record. And I think that until consumer balance sheets weaken considerably, we can expect consumer spending, which is the largest part of the economy, to continue to grow quickly.

[But this] doesn’t mean that a recession is not coming. There’s always a recession somewhere down the road.

Rodney Ramcharan: Indeed, yes, there’s a likelihood that the economy is going to contract in the next nine months. The president of the New York Fed expects the unemployment rate to go up from 3.5% currently to somewhere between 4% to 5% in the next year. And I think that will be consistent with a recession.

In terms of how much worse it can be beyond that, it’s going to depend on a number of things. It could depend on whether the Fed is going to accept a higher inflation rate over the medium term or whether it’s really committed to getting the inflation rate down to the 2% rate. So I think that’s the trade-off.

Will unemployment go up?

Blank: [Unemployment] hasn’t risen much, and maybe it’ll pick up to somewhere close to 4%. Many are expecting something like four and a half percent. And I think that’s certainly possible. And I think that we can see small upticks in the coming months.

But I don’t think it’s going to rise as quickly as some people are expecting, in part because what we’ve seen so far is a lack of labor force participation. Until more people enter the labor market, I think there are going to be plenty of jobs to go around.

What is your outlook on interest rates?

Ramcharan: As people find it more and more difficult to find jobs, or to get jobs as they begin to lose jobs, I think that’s going to dampen spending. And we’re seeing that now as the cost of borrowing has gone up sharply, and the Fed is expecting that.

The expectation is the federal funds rate will go up to 5% by next year. If you tack on another couple of points, because of the risk involved, then the cost to borrow to buy a home could potentially get up to 8% for some people. And that could be very expensive.

And the flip side of this for businesses is there’s potentially going to be a slowdown in cash flow. If consumers are not spending, then the revenues that businesses depend on to make investments might not be there.

The additional piece in this puzzle is what the banks will then do. I think banks are going to begin to curtail the extension of credit. So not only will interest rates go up for the typical consumer and the typical business, it’s also likely that they are more likely to experience denial of credit, and so that should together begin to slow spending quite a bit.

After massive increases in housing prices, what caused them to suddenly drop?

Ramcharan: As the Fed lowered interest rates, there was a massive shift among the population for various reasons. They decided that housing was the right investment or the right thing. And so when 50 million people all collectively decide to buy homes, the supply of homes is reasonably constrained in the short run. And so that led to this massive increase in house prices and in rents.

In the last three months, the housing market has cooled sharply. We’re now seeing house prices beginning to fall. I would imagine, going forward, the housing market cooling is going to be a major driver behind the slowdown in the inflation rate and in real estate investment trusts. So that’s positive.

Our recent election just changed the composition of Congress. How will that affect the economy?

Blank: Certainly, when we have a divided Congress, we’re less likely to see decisions made that involve passing legislation that might support the economy. And I think it’s likely the Republican House is going to become a little bit more conservative with spending.

And so if we do start to see a downturn, I think you’re less likely to see legislation that might help support an economy that could be in need of it. That is going to make the job of the Federal Reserve more important.

How certain are these predictions?

Ramcharan: I just want to be careful here and let your viewers know that we’re making these statements based on theory, because the inflation that we’re experiencing now comes about from a pandemic, and there really is no evidence, there’s no data available, that people can look to to say, “What happens to an economy after a pandemic?” That data does not exist.

So we’re trying to piece together the data we do have with the theories we do have, but there’s a huge band of uncertainty about what’s going to happen.

Watch the full interview here.The Conversation

About the Authors:

D. Brian Blank, Assistant Professor of Finance, Mississippi State University and Rodney Ramcharan, Professor of Finance and Business Economics, University of Southern California

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

Economics & Fundamentals Financial News
19 Dec

Prospects for a “Santa Claus rally” are decreasing by reassessment of global bank policy tightening

By JustMarkets

Prospects for a “Santa Claus rally” are decreasing every day as investors fear that aggressive Federal Reserve policy tightening will hamper stock indices. At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 0.85% (-1.79% for the week), and the S&P 500 Index (US500) was down by 1.11% (-2.21% for the week). The Technology Index NASDAQ (US100) fell by 0.97% on Friday (-2.81% for the week). All three indices closed the week lower.

The outlook for economic activity, financial conditions, and investment appetite is rather limited at the moment. The search for a recovery in risk assets over the past few weeks has been more of a course of investor complacency than a turnaround in fundamentals. Assumptions about seasonal trends are likely to play a bigger role in market developments over the next few weeks than any significant change in issues such as interest rate expectations.

Equity markets in Europe were mostly down last week. Germany’s DAX (DE30) decreased by 0.67% (-2.85% for the week), France’s CAC 40 (FR40) fell by 1.08% (-2.94% for the week), Spain’s IBEX 35 index (ES35) was down by 1.29% (-1.80% for the week), the British FTSE 100 (UK100) closed Friday down by 1.27% (-1.93% for the week).

In Europe, the tension between Italy and the ECB is growing. Three high-ranking Italian politicians criticized the European Central Bank’s increase in borrowing costs, pointing to rising tensions between Giorgio Meloni’s government and Frankfurt officials. Italy’s defense minister, a close ally of Meloni, tweeted Thursday that the ECB’s interest rate hike and President Christine Lagarde’s hawkish tone are an unwelcome “gift” to the country. The yield spread between German and Italian 10-year bonds, considered a key indicator of risk in the region, widened 13 basis points to more than 200 basis points Thursday after the ECB’s decision. And on Friday, the spread rose another 10 basis points to 215 basis points. The European Central Bank expects to implement at least two more successive rate hikes of 50 basis points.

Oil recovery last week was stifled by renewed recession fears and long-term interest rate hikes by global central banks. Rising rates have a negative impact on the demand for “black” gold, which translates into lower quotes. Also, the growth of infections in China (one of the largest importers of oil in the world) may further reduce the demand for fuel. On the other hand, the US Department of Energy announced on Friday that from February, it would begin to replenish depleted national strategic oil reserves (SPR) with an initial purchase of 3 million barrels. This news may push oil bulls to buy oil.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) decreased by 0.77% for the week, China’s FTSE China A50 (CHA50) lost 0.71%, Hong Kong’s Hang Seng (HK50) decreased by 0.73%, India’s NIFTY 50 (IND50) fell by 0.47%, and Australia’s S&P/ASX 200 (AU200) was down by 0.78% for the week.

China’s economic activity weakened in November before the government abruptly abandoned its Covid Zero policy, with a surge in infections in the coming months likely to cause more turmoil and push policymakers to increase stimulus. Key data released Thursday showed that business and consumer activity fell to its lowest level since the spring quarantine in Shanghai.

In the commodities market, futures on natural gas (+5.86%), WTI oil (+5.14%), coffee (+4.55%), BRENT oil (+4.15%), gasoline (+4.1%), wheat (+3.23%) and sugar (+2.5%) showed the biggest gains by the end of the week. Futures on palladium (-13.37%), lumber (-5.48%), platinum (-3.58%), copper (-2.8%), and orange juice (-2.44%) showed the biggest drop.

S&P 500 (F) (US500)  3,852.36 −43.39 (−1.11%)

Dow Jones (US30) 32,920.46 −281.76 (−0.85%)

DAX (DE40) 13,893.07 −93.16 (−0.67%)

FTSE 100 (UK100) 7,332.12 −94.05 (−1.27%)

USD Index 104.84 +0.28 (+0.27%)

Important events for today:
  • – Germany Ifo Business Climate (m/m) at 11:00 (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.

Economics & Fundamentals Financial News
15 Dec

Investors overestimate risks as US Fed signals higher final rate hike

By JustMarkets

Stock indices closed lower Wednesday as the Federal Reserve shifted to a slower pace of rate hikes but also signaled that rates will reach higher levels than previously expected. The US Federal Reserve raised interest rates by 0.5% and raised its rate forecast to a peak of 5.1%, which will remain through 2023. As the stock market closed, the Dow Jones Index (US30) decreased by 0.42%, and the S&P 500 Index (US500) lost 0.61%. Technology Index NASDAQ (US100) was down by 0.76% on Wednesday. All three indices closed the day lower.

The main points of the speech of the US Federal Reserve Chairman Jerome Powell:

  • There is a commitment to return inflation to the 2% target to ensure price stability, which is key to economic stability.
  • Rate hikes will slow in 2023. The Fed’s rate guidance is projected to reach 5.00%-5.25%, but everything will depend on incoming economic data.
  • No rate cut is currently projected for 2023
  • The labor market and price stability (mainly in food, housing, and transportation) are the key factors for the decision to raise the rate.
  • Inflation data for October and November 2022 showed visible progress, but more certainty is needed that it is controlled, so the monetary policy remains constrained.
  • The reduction in assets in Treasury securities will continue.
  • The labor market is extremely strong. The expected unemployment rate as a result of restraining monetary policy could reach 4.5% versus 3.7% at the moment.

Equity markets in Europe were mostly down yesterday. German DAX (DE30) decreased by 0.26%, French CAC 40 (FR40) lost 0.21%, Spanish IBEX 35 (ES35) added 0.39%, and British FTSE 100 (UK100) closed on Wednesday down by 0.09%.

The ECB will hold its monetary policy meeting today. Analysts expect the ECB to raise the interest rate by 0.5%. The main focus of investors will be the speech of ECB head Christine Lagarde, as well as the ECB’s decision on quantitative tightening (QT).

Yesterday, the Bank of England released its Financial Stability Report, warning that 2023 will be a difficult year for British households due to a combination of falling real incomes, rising mortgage costs, and rising unemployment. After Monday’s positive GDP data, UK Chancellor Jeremy Hunt warned that the economy could worsen before getting better. While yesterday’s employment data was mostly positive, it did indicate a slowdown in hiring as businesses prepare for a tough start to 2023. Wage growth (year-over-year) peaked, adding to the challenge for the Bank of England as it tries to balance recession fears with rising costs of living. The Bank of England (BoE) will meet today with the market consensus for a 50 basis point increase.

Oil prices fell slightly yesterday due to a stronger dollar, and the possibility of further interest rate hikes by global central banks also added to concerns about demand for “black gold.” On the other hand, the restriction by the G7 countries and allies on Russian oil prices will be a restraining factor for the growth.

Asian markets were mostly on the rise yesterday. Japan Nikkei 225 (JP225) gained 0.72%, China FTSE China A50 (CHA50) jumped by 0.93%, Hong Kong Hang Seng (HK50) increased by 0.39% on the day, India NIFTY 50 (IND50) added 0.28%, and Australia S&P/ASX 200 (AU200) gained 0.68% on the day.

Chinese economic data for November was much lower than expected. The world’s second-largest economy lost even more momentum as factory output slowed, and retail sales continued to decline amid a rise in COVID-19 cases.

Japan’s exports rose by 20% in November from a year earlier, but imports outpaced shipments, leading to a 16th consecutive month of trade deficits, Ministry of Finance (MOF) data showed Thursday. As a result, the trade balance came in at a deficit of 2.03 trillion yen ($15.00 billion), compared with an average estimate of a deficit of 1.68 trillion yen.

S&P 500 (F) (US500) 3,995.32 −24.33 (−0.61%)

Dow Jones (US30) 33,966.35 −142.29 (−0.42%)

DAX (DE40) 14,460.20 −37.69 (−0.26%)

FTSE 100 (UK100) 7,495.93 −6.96 (−0.093%)

USD Index 103.63 −0.35 (−0.34%)

Important events for today:
  • – Australia Unemployment Rate (m/m) at 02:30 (GMT+2);
  • – China Industrial Production (m/m) at 04:00 (GMT+2);
  • – China Retail Sales (m/m) at 04:00 (GMT+2);
  • – China Unemployment Rate (m/m) at 04:00 (GMT+2);
  • – China NBS Press Conference at 04:00 (GMT+2);
  • – Switzerland SNB Interest Rate Decision at 10:30 (GMT+2);
  • – Switzerland SNB Monetary Policy Assessment at 10:30 (GMT+2);
  • – Switzerland SNB Press Conference at 11:00 (GMT+2);
  • – Norwegian Interest Rate Decision at 11:00 (GMT+2);
  • – UK BoE Interest Rate Decision at 14:00 (GMT+2);
  • – UK BoE MPC Meeting Minutes at 14:00 (GMT+2);
  • – Eurozone ECB Interest Rate Decision at 15:15 (GMT+2);
  • – Eurozone ECB Monetary Policy Statement at 15:15 (GMT+2);
  • – US Retail Sales (m/m) at 15:30 (GMT+2);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
  • – US Philadelphia Fed Manufacturing Index (m/m) at 15:30 (GMT+2);
  • – Eurozone ECB Press Conference at 15:45 (GMT+2);
  • – US Industrial Production (m/m) at 16:15 (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.

Economics & Fundamentals Financial News
15 Dec

Fed Signals More Rate Hikes, Focus Turns To BoE & ECB

By ForexTime

Asian shares flashed red on Thursday, tracking declines in Wall Street overnight after the Federal Reserve signalled interest rates will climb higher than anticipated.

This fresh development strained risk appetite as investors became concerned over tighter monetary policy triggering a recession. European futures are pointing to a negative open this morning amid the cautious mood and this could circle back to US indices later today.  In the currency space, the USD loitered near a six-month low against major peers despite the hawkish Fed while gold slipped back under $1800.

Overnight, more disappointing economic data from the second-largest economy in the world fuelled recession fears. China’s latest retail sales declined by 5.9% year-on-year in November which was much faster than the 0.5% witnessed in October and below the 3.7% market forecast. On top of this, the country’s industrial production for November grew 2.2% compared to the 5% expansion in October. With Coronavirus outbreaks worsening in China last month, the stricter control measures weighed heavily on the economy.

Let’s talk about the Fed…

As widely expected, the Federal Reserve raised interest rates by 50 basis points overnight, marking the end of the jumbo 75 basis point hikes seen in at the previous four meetings.

However, there were some key takeaways and golden nuggets in the policy meeting which offered investors fresh insight into the central bank’s thinking for 2023. Fed Chair Jerome Powell stated that the central bank had “some ways to go” in its battle against inflation. Although there have been signs of inflation cooling, at 7.1% it’s still well above the Fed’s 2% target. With policymakers projecting rates would end next year at 5.1%, this was higher than futures markets had predicted and the previously indicated 4.6% at their last dot plot in September. It looks like the Fed has ended 2022 on a hawkish note, leaving the doors wide open to more rate hikes in the New Year in an effort to control inflation.

After breaking below the 104.00 level, the Dollar Index (DXY) could be preparing for a steeper decline. Prices are trading below the 50-, 100- and 200-day Simple Moving Averages while the MACD is below zero. An intraday breakdown below 103.50 may signal a selloff towards 102.40. If bulls can push prices back above 104.00, a move towards 105.50 – a level just below the 200-day SMA – could be on the cards.

BoE expected to raise rates again

Markets widely expect the Bank of England to slow the pace of interest rate hikes today as it juggles the risks of sky-high inflation with concerns over economic growth.

After the jumbo 75-basis point hike back in November, the BoE is expected to shift into a lower gear with a 50-basis point hike today. This will put the benchmark rate at 3.5% which will be the highest level since 2008. Indeed, signs of easing inflationary pressures have reduced the pressure for the BoE to move ahead with a super-sized rate hike. The latest UK CPI data for November confirmed that inflation eased to 10.7% in November 2022, from 11.1% in October, suggesting that inflation may have peaked. Nevertheless, consumer prices are still well above the BoE’s 2% target – forcing the bank to continue raising interest rates in 2023, albeit at a slower pace.

It may be wise to keep a close eye on the latest UK retail sales, PMI figures, and consumer confidence which could offer additional insight into the health of the economy. But given how the UK economy is likely in recession due to the cost-of-living crisis, the central bank is trapped between a rock and a hard place. Whatever the outcome of the BoE meeting, it will most likely set the tone for the GBPUSD for the rest of 2022.

ECB meeting preview

After two consecutive rate hikes of 75 basis points, the European Central Bank (ECB) is also expected to slow down, raising rates by 50 basis points today.

The central bank is likely to announce Quantitative Tightening next year, however, no specific dates are expected to be revealed. Signs of cooling inflation in Europe may offer some breathing room for the ECB to adopt a less aggressive approach toward rates in 2023. Investors will direct much of their attention towards the staff projections which are expected to show inflation expectations pushed upwards for the New Year and economic growth forecasts lowered. Should the ECB strike a hawkish tone and signal more rate hikes in 2023, this could inject euro bulls with renewed inspiration. Alternatively, a cautious-sounding central bank that expresses concerns over the growth outlook could result in a weaker euro.

Looking at the technical picture, EURUSD remains firmly bullish on the daily timeframe. The recent breakout and daily close above 1.0600 could signal further upside with 1.0760 acting as a point of interest.

Commodity spotlight – Gold

Gold extended losses this morning as investors digested Fed Chair Jerome Powell’s hawkish statement overnight. With the Fed still waging war against inflation and interest rates expected to climb higher than anticipated, the appetite for zero-yielding gold took a hit. Prices are approaching the 200-day Simple Moving Average around $1785. A strong breakdown below this level could signal a selloff towards $1766 and $1750, 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
14 Dec

Inflation failed to steal Christmas from investors

By JustMarkets

The US consumer inflation rate fell from 7.7% to 7.1% year-over-year. Core inflation (which excludes food and energy prices) also fell from 6.3% to 6.1%. Overall, the latest data provided the strongest evidence that the United States inflation is slowing steadily. The markets reacted with an impulse to this data. As the stock market closed Tuesday, the Dow Jones Index (US30) increased by 0.30%, and the S&P 500 Index (US500) jumped by 0.73%. The technology index NASDAQ (US100) was up 1.01% on Tuesday. All three indices closed the day in positive territory.

There is a 79.4% chance that the Fed will raise interest rates by 0.5% today. This move will follow four hikes of three quarters in a row. A half-point hike would put the Fed’s key short-term rate at 4.5%. Markets will also be watching closely for Fed Chairman Jerome Powell’s speech after the Fed meeting to see signs of whether the Central Bank believes inflation has declined enough to continue lowering the pace of interest rate hikes.

But the inflation report has some negative things to say. For example, the cost of housing, which makes up nearly a third of the US consumer price index, continues to rise. But real-time rent and home price indicators are starting to fall. The real estate market remains in recession.

President Joe Biden called the inflation report “good news for families across the country” and noted that lower car and toy prices should benefit holiday shoppers. Nevertheless, Biden acknowledged that inflation may not return to “normal levels” until late next year.

Equity markets in Europe were mostly up yesterday. The German DAX (DE30) gained 1.34%, the French CAC 40 (FR40) added 1.42%, the Spanish IBEX 35 (ES35) jumped by 0.83%, the British FTSE 100 (UK100) closed Tuesday in plus 0.76%.

Unlike the US Federal Reserve, the ECB is still far from completing its monetary tightening cycle. The ECB politicians will meet tomorrow, expecting to raise the interest rate by 0.5%. But with a high probability, the “lowering” of the step from 75 to 50 basis points will be accompanied by more aggressive quantitative tightening (QT). Experts believe that the ECB will phase out reinvestment of its asset purchase program portfolio during 2023.

The ZEW economic sentiment indicator for Germany rose by 13.4 points from 36.7 to 23.3. The German economic sentiment indicator also continues to improve and is currently at 61.4, up 3.1 points from the previous month. Germany’s economic outlook has thus become significantly more optimistic over the past two months.

Gold prices hit a six-month high amid slowing US inflation. Prices of precious metals are inversely correlated with the dollar index and government bond yields, so when the dollar falls, gold and silver prices rise.

The price of oil surpassed $80 a barrel on Tuesday and recorded its biggest daily gain in more than a month as investors bought up risky assets after US data pointed to a slowdown in inflation. Concerns over oil supply disruptions, including the ongoing shutdown of the Keystone pipeline from Canada to the US after a major leak last week, also supported the market.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.44%, China’s FTSE China A50 (CHA50) was down by 0.02%, Hong Kong’s Hang Seng (HK50) jumped by 0.68% on the day, India’s NIFTY 50 (IND50) added 0.60%, and Australia’s S&P/ASX 200 (AU200) was up 0.31% on the day.

Sentiment among Japan’s big manufacturers deteriorated in the fourth quarter amid rising price pressures, a Bank of Japan survey showed Wednesday, although the lifting of restrictions because of COVID-19 boosted service sector sentiment. The Tankan Large Non-Manufacturers Index jumped to 19 in the fourth quarter, beating expectations of 17 and the previous quarter’s reading of 14. Japan’s manufacturing sector has been hit hard by rising inflation and a weaker yen this year, which has increased manufacturing costs. Although most manufacturers have passed these costs on to customers, this has also had a negative impact on sales.

S&P 500 (F) (US500) 4,019.65 +29.09 (+0.73%)

Dow Jones (US30) 34,108.64 +103.60 (+0.30%)

DAX (DE40) 14,497.89 +191.26 (+1.34%)

FTSE 100 (UK100) 7,502.89 +56.92 (+0.76%)

USD Index 105.02 +0.21 (+0.20%)

Important events for today:
  • – Australia RBA Gov Lowe Speaks at 00:30 (GMT+2);
  • – Japan Tankan Manufacturing (q/q) at 01:50 (GMT+2);
  • – Japan Non-Tankan Manufacturing (q/q) at 01:50 (GMT+2);
  • – Japan Industrial Production (m/m) at 06:30 (GMT+2);
  • – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
  • – Spanish Consumer Price Index (m/m) at 10:00 (GMT+2);
  • – Eurozone Industrial Production (m/m) at 12:00 (GMT+2);
  • – US Crude Oil Reserves (w/w) at 17:30 (GMT+2);
  • – US Fed Interest Rate Decision at 21:00 (GMT+2);
  • – US FOMC Statement at 21:00 (GMT+2);
  • – US FOMC Press Conference at 21:30 (GMT+2);
  • – New Zealand GDP (q/q) at 23:45 (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.

Economics & Fundamentals Financial News
13 Dec

Why fusion ignition is being hailed as a major breakthrough in fusion – a nuclear physicist explains

By Carolyn Kuranz, University of Michigan 

American scientists have announced what they have called a major breakthrough in a long-elusive goal of creating energy from nuclear fusion.

The U.S. Department of Energy said on Dec. 13, 2022, that for the first time – and after several decades of trying – scientists have managed to get more energy out of the process than they had to put in.

But just how significant is the development? And how far off is the long-sought dream of fusion providing abundant, clean energy? Carolyn Kuranz, an associate professor of nuclear engineering at the University of Michigan who has worked at the facility that just broke the fusion record, helps explain this new result.

An image of the Sun.
Fusion is the same process that powers the Sun.
NASA/Wikimedia Commons

What happened in the fusion chamber?

Fusion is a nuclear reaction that combines two atoms to create one or more new atoms with slightly less total mass. The difference in mass is released as energy, as described by Einstein’s famous equation, E = mc2 , where energy equals mass times the speed of light squared. Since the speed of light is enormous, converting just a tiny amount of mass into energy – like what happens in fusion – produces a similarly enormous amount of energy.

Researchers at the U.S. Government’s National Ignition Facility in California have demonstrated, for the first time, what is known as “fusion ignition.” Ignition is when a fusion reaction produces more energy than is being put into the reaction from an outside source and becomes self-sustaining.

A gold and plastic canister.
The fuel is held in a tiny canister designed to keep the reaction as free from contaminants as possible.
U.S. Department of Energy/Lawrence Livermore National Laboratory

The technique used at the National Ignition Facility involved shooting 192 lasers at a 0.04 inch (1 mm) pellet of fuel made of deuterium and tritium – two versions of the element hydrogen with extra neutrons – placed in a gold canister. When the lasers hit the canister, they produce X-rays that heat and compress the fuel pellet to about 20 times the density of lead and to more than 5 million degrees Fahrenheit (3 million Celsius) – about 100 times hotter than the surface of the Sun. If you can maintain these conditions for a long enough time, the fuel will fuse and release energy.

The fuel and canister get vaporized within a few billionths of a second during the experiment. Researchers then hope their equipment survived the heat and accurately measured the energy released by the fusion reaction.

So what did they accomplish?

To assess the success of a fusion experiment, physicists look at the ratio between the energy released from the process of fusion and the amount of energy within the lasers. This ratio is called gain.

Anything above a gain of 1 means that the fusion process released more energy than the lasers delivered.

On Dec. 5, 2022, the National Ignition Facility shot a pellet of fuel with 2 million joules of laser energy – about the amount of power it takes to run a hair dryer for 15 minutes – all contained within a few billionths of a second. This triggered a fusion reaction that released 3 million joules. That is a gain of about 1.5, smashing the previous record of a gain of 0.7 achieved by the facility in August 2021.

How big a deal is this result?

Fusion energy has been the “holy grail” of energy production for nearly half a century. While a gain of 1.5 is, I believe, a truly historic scientific breakthrough, there is still a long way to go before fusion is a viable energy source.

While the laser energy of 2 million joules was less than the fusion yield of 3 million joules, it took the facility nearly 300 million joules to produce the lasers used in this experiment. This result has shown that fusion ignition is possible, but it will take a lot of work to improve the efficiency to the point where fusion can provide a net positive energy return when taking into consideration the entire end-to-end system, not just a single interaction between the lasers and the fuel.

A hallway full of pipes, tubes and electronics.
Machinery used to create the powerful lasers, like these pre-amplifiers, currently requires a lot more energy than the lasers themselves produce.
Lawrence Livermore National Laboratory, CC BY-SA

What needs to be improved?

There are a number of pieces of the fusion puzzle that scientists have been steadily improving for decades to produce this result, and further work can make this process more efficient.

First, lasers were only invented in 1960. When the U.S. government completed construction of the National Ignition Facility in 2009, it was the most powerful laser facility in the world, able to deliver 1 million joules of energy to a target. The 2 million joules it produces today is 50 times more energetic than the next most powerful laser on Earth. More powerful lasers and less energy-intensive ways to produce those powerful lasers could greatly improve the overall efficiency of the system.

Fusion conditions are very challenging to sustain, and any small imperfection in the capsule or fuel can increase the energy requirement and decrease efficiency. Scientists have made a lot of progress to more efficiently transfer energy from the laser to the canister and the X-ray radiation from the canister to the fuel capsule, but currently only about 10% to 30% of the total laser energy is transferred to the canister to the fuel.

Finally, while one part of the fuel, deuterium, is naturally abundant in sea water, tritium is much rarer. Fusion itself actually produces tritium, so researchers are hoping to develop ways of harvesting this tritium directly. In the meantime, there are other methods available to produce the needed fuel.

These and other scientific, technological and engineering hurdles will need to be overcome before fusion will produce electricity for your home. Work will also need to be done to bring the cost of a fusion power plant well down from the US$3.5 billion of the National Ignition Facility. These steps will require significant investment from both the federal government and private industry.

It’s worth noting that there is a global race around fusion, with many other labs around the world pursuing different techniques. But with the new result from the National Ignition Facility, the world has, for the first time, seen evidence that the dream of fusion is achievable.The Conversation

About the Author:

Carolyn Kuranz, Associate Professor of Nuclear Engineering, University of Michigan

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

 

Economics & Fundamentals Opinions
12 Dec

Fed wants inflation to get down to 2% – but why not target 3%? Or 0%?

By Veronika Dolar, SUNY Old Westbury 

What’s so special about the number 2? Quite a lot, if you’re a central banker – and that number is followed by a percent sign.

That’s been the de facto or official target inflation rate for the Federal Reserve, the European Central Bank and many other similar institutions since at least the 1990s.

But in recent months, inflation in the U.S. and elsewhere has soared, forcing the Fed and its counterparts to jack up interest rates to bring it down to near their target level.

As an economist who has studied the movements of key economic indicators like inflation, I know that low and stable inflation is essential for a well-functioning economy. But why does the target have to be 2%? Why not 3%? Or even zero?

Soaring inflation

The U.S. inflation rate hit its 2022 peak in July at an annual rate of 9.1%. The last time consumer prices were rising this fast was back in 1981 – over 40 years ago.

Since March 2022, the Fed has been actively trying to decrease inflation. In order to do this, the Fed has been hiking its benchmark borrowing rate – from effectively 0% back in March 2022 to the current range of 3.75% to 4%. And it’s expected to lift interest rates another 0.5 percentage point on Dec. 14 and even more in 2023.

Most economists agree that an inflation rate approaching 8% is too high, but what should it be? If rising prices are so terrible, why not shoot for zero inflation?

Maintaining stable prices

One of the Fed’s core mandates, alongside low unemployment, is maintaining stable prices.

Since 1996, Fed policymakers have generally adopted the stance that their target for doing so was an inflation rate of around 2%. In January 2012, then-Chairman Ben Bernanke made this target official, and both of his successors, including current Chair Jerome Powell, have made clear that the Fed sees 2% as the appropriate desired rate of inflation.

Until very recently, though, the problem wasn’t that inflation was too high – it was that it was too low. That prompted Powell in 2020, when inflation was barely more than 1%, to call this a cause for concern and say the Fed would let it rise above 2%.

Many of you may find it counterintuitive that the Fed would want to push up inflation. But inflation that is persistently too low can pose serious risks to the economy.

These risks – namely sparking a deflationary spiral – are why central banks like the Fed would never want to adopt a 0% inflation target.

Perils of deflation

When the economy shrinks during a recession with a fall in gross domestic product, aggregate demand for all the things it produces falls as well. As a result, prices no longer rise and may even start to fall – a condition called deflation.

Deflation is the exact opposite of inflation – instead of prices rising over time, they are falling. At first, it would seem that falling and lower prices are a good thing – who wouldn’t want to buy the same thing at a lower price and see their purchasing power go up?

But deflation can actually be pretty devastating for the economy. When people feel prices are headed down – not just temporarily, like big sales over the holidays, but for weeks, months or even years – they actually delay purchases in the hopes that they can buy things for less at a later date.

For example, if you are thinking of buying a new car that currently costs US$60,000, during periods of deflation you realize that if you wait another month, you can buy this car for $55,000. As a result, you don’t buy the car today. But after a month, when the car is now for sale for $55,000, the same logic applies. Why buy a car today, when you can wait another month and buy a car for $50,000 next month.

This lower spending leads to less income for producers, which can lead to unemployment. In addition, businesses, too, delay spending since they expect prices to fall further. This negative feedback loop – the deflationary spiral – generates higher unemployment, even lower prices and even less spending.

In short, deflation leads to more deflation. Throughout most of U.S. history, periods of deflation usually go hand in hand with economic downturns.

Everything in moderation

So it’s pretty clear some inflation is probably necessary to avoid a deflation trap, but how much? Could it be 1%, 3% or even 4%?

Maybe. There isn’t any strong theoretical or empirical evidence for an inflation target of exactly 2%. The figure’s origin is a bit murky, but some reports suggest it simply came from a casual remark made by the New Zealand finance minister back in the late 1980s during a TV interview.

Moreover, there’s concern that creating economic targets for economic indicators like inflation corrupts the usefulness of the metric. Charles Goodhart, an economist who worked for the Bank of England, created an eponymous law that states: “When a measure becomes a target, it ceases to be a good measure.”

Since a core mission of the Fed is price stability, the target is beside the point. The main thing is that the Fed guide the economy toward an inflation rate high enough to allow it room to lower interest rates if it needs to stimulate the economy but low enough that it doesn’t seriously erode consumer purchasing power.

Like with so many things, moderation is key.The Conversation

About the Author:

Veronika Dolar, Assistant Professor of Economics, SUNY Old Westbury

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

 

Economics & Fundamentals Opinions
12 Dec

Financial markets are gearing up for the busiest week this month

By JustMarkets

In the United States, the PPI, which measures inflation between factories and plants, rose by 0.4% last month. This is a negative sign, indicating that the current rate of inflation may not yet be peaking. A stronger-than-expected consumer confidence report also contributed to a late-session sell-off in stocks. At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 0.90% (-2.50% for the week) and the S&P 500 Index (US500) lost 0.73% (-2.90% for the week). The Technology Index NASDAQ (US100) was down by 0.70% on Friday (-3.31% for the week). All three indices closed the week lower.

The PPI report confirmed Chairman Powell’s recent speech that while the October inflation data was encouraging, it will take much more effort to bring down inflation. But there is also a positive side. Annual inflation expectations fell to 4.6% from 4.9%, the lowest since September 2021, according to a University of Michigan survey.

The US Federal Reserve will hold its last meeting of the year this week. Experts point to a 78% chance that the Fed will raise rates by 0.5%. The probability of raising the rate by 0.75% is 21%. Meanwhile, US inflation data on Tuesday will shed light on the Fed’s future plans, which will set the tone for US indices and stocks for the rest of the year and the beginning of 2023.

Equity markets in Europe were mostly down last week. German DAX (DE30) gained 0.74% (-0.81% for the week), French CAC 40 (FR40) added 0.46% (-0.76% for the week), Spanish IBEX 35 (ES35) gained 0.78% (-1.20% for the week), British FTSE 100 (UK100) closed on Friday up by 0.06% (-1.05% for the week).

The UK will publish the next GDP and Industrial Production Data today. Analysts believe that if the GDP shows a decline, the UK will move from the stagflation phase to a full-blown recession. The wage and price spiral could lead to hyperinflation and destabilize the economy. According to the latest CBI report, UK business investment continues to decline.

The Swiss National Bank (SNB) will meet on December 15 and is expected to decide on a third rate hike, this time probably by 50 basis points, in the context of stabilizing inflation at 3%. A further rate hike could come in March 2023, after which the SNB will probably pause for the rest of the year.

Gold and silver have been trading higher in recent weeks as the US dollar lost some ground due to an impending rate hike by the US Federal Reserve. But as central banks remain focused on curbing inflation through restrictive tightening of monetary policy, the fundamental component is not yet in favor of the precious metals. On the other hand, the tightening cycle is in its final stages, and investors are beginning to move into gold and silver in advance. But traders should understand that if recession fears weaken, the dollar index might strengthen again, which would have a negative impact on gold quotes.

Last week, black gold prices were falling as the EU and allies put a price cap on Russian oil. But oil prices rose on Friday and continued to rise in Asian morning trading on Monday as Russian President Vladimir Putin threatened to cut production in response to a Western price cap on Russian oil exports. Another factor in the rise in oil prices was the closure of a key oil pipeline between Canada and the United States over the weekend.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) gained 0.53% over the week, China’s FTSE China A50 (CHA50) was down by 0.87%, Hong Kong’s Hang Seng (HK50) jumped by 3.53%, India’s NIFTY 50 (IND50) decreases by 0.84%, and Australia’s S&P/ASX 200 (AU200) was down by 1.21%.

Optimism about the cancellation of COVID measures in China was largely neutralized by fears that a large spike in local infections would delay a broader opening.

Wholesale prices in Japan fell from 9.4% to 9.3% year-over-year in November. The drop in producer prices points to a possible peak in inflation amid a decline in global commodity prices. Global commodity prices and the weakness of the yen, which increases the cost of imports, are pushing wholesale and consumer inflation upward. Japanese policymakers fear that such a trend could hurt Japan’s fragile economic recovery, so they are keeping rates at ultra-low levels.

In the commodities market, futures on orange juice (+5.45%), lumber (+3.76%), soybeans (+3.06%), and palladium (+2.86%) showed the biggest gains by the end of the week. Futures on WTI oil (-10.49%), BRENT oil (-10.23%), gasoline (-9.67%), wheat (-3.71%), coffee (-3.01%), and cotton (-2.62%) showed the biggest drop.

S&P 500 (F) (US500) 3,934.38 −29.13 (−0.73%)

Dow Jones (US30) 33,476.46 −305.02 (−0.90%)

DAX (DE40) 14,370.72 +106.16 (+0.74%)

FTSE 100 (UK100) 7,476.63 +4.46 (+0.06%)

USD Index 104.93 +0.16 (+0.15%)

Important events for today:
  • – UK GDP (m/m) at 09:00 (GMT+2);
  • – UK Industrial Production (m/m) at 09:00 (GMT+2);
  • – UK Manufacturing Production (m/m) at 09:00 (GMT+2);
  • – Canada BoC Gov Macklem Speaks at 22:25 (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.

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