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Many of today’s inflation hawks attribute the current high levels of inflation to excessively loose economic policies — both fiscal and monetary. They point to the policies implemented at the onset of the pandemic when public health considerations precipitative forced shutdowns across many sectors of the economy. At that time, Congress passed a massive covid relief bill that directly defrayed business losses and supported consumer spending; and the Fed sharply ramped up its purchases of financial assets, keeping interest rates near zero and assuring ample liquidity to allow the recovery to gain traction. Would it really have been a better choice to have pursued policies that would have deferred these achievements until some more distant date? I tend to think not. I accept the current level of inflation as somewhat of the price that had to be paid to get America back to work. In any case, if you want to blame policy makers for being responsible for our current inflation, it’s only fair to credit those same people and institutions for precipitating the rapid pace of economic expansion that we’ve enjoyed for the last 6 quarters and counting, culminating with the recovery of virtually all the job losses from… Read More »Fighting inflation: Challenging conventional wisdom

A barrage of economic indicators out of Europe and America will put the spotlight on the euro and US dollar next week. The data could further reinforce the diverging paths of monetary policy between the Federal Reserve and European Central Bank. European traders will additionally be keeping a watch on the outcome of the French presidential election, while RBA policy could come under scrutiny too as Australia publishes quarterly CPI numbers. But it is the Bank of Japan that could attract the most attention as it is set to keep policy unchanged even as the yen plunges across FX markets.  

EU flash CPI (Apr) – 29/04 – despite an inflation rate that is already at a record high of 7.4%, the recent ECB meeting saw a slightly more dovish tilt from President Lagarde and the governing council. This came across as a bit of a surprise to a lot of people given the hawkish tilt seen in the March meeting. This stance has already started to shift, even as core prices remain over half of where headline CPI is at 2.9%. We’ve seen a raft of ECB policymakers become more vocal about a rate rise as soon as July, with Belgian ECB council member Pierre Wunsch and ECB vice President Luis de Guindos saying a July move is becoming more likely. These calls are likely to get louder if we are to take clues from the likes of UK and US core CPI, which initially lagged behind the headline rate, and now appear to be accelerating. The ECB appears to be underestimating this effect, although there is slightly more slack in the eurozone labour market, which means wage growth will lag more. Another hot number here, with a move to 7.6% will ramp up the pressure for a July rate… Read More »The Week Ahead: French election, BoJ, UK banks, Microsoft, Apple and Meta results

Equity markets remain directionless as earnings season ramps up. Bond yields rise again, hitting equity sentiment. Next week is when earnings season really kicks off. Another directionless week for equities as some initial enthusiasm was knocked on the head from firstly Netflix (NFLX) and then rising bond yields. Netflix found plenty of willing sellers but not too many willing subscribers. The stock did a Facebook and plummeted in a huge market cap fall. This marks the second quarter in a row that Netflix has managed such a collapse so investors are now growing increasingly nervous that the same fate awaits Facebook Meta (FB) next week. Tesla (TSLA) did manage to turn things around briefly on Thursday as it unveiled a strong set of results. Deliveries remained strong despite shutdowns in Giga Shanghai but many investors, including your author, were still surprised just how strong earnings were. Demand was never an issue for Tesla but supply so far is not holding it back. Demand in fact is so strong it is leading to inventories falling to just a few days for Tesla.  But taking a step back and looking at the broader picture it was once again the bond vigilantes that… Read More »Week Ahead on Wall Street (SPY) (QQQ): Netflix finds sellers but no subscribers, yields hit equity indicies

Daniel believes that China has issues besides Covid. Remember Evergrande. He believes Macron will win in France this weekend. He also sees a move by China against Taiwan soon.

Summary United States: Higher Mortgage Rates Begin to Bite The sharp rise in mortgage rates appears to be slowing residential activity. Existing home sales fell 2.7% during March. Housing starts inched up 0.3% during March. However, single-family starts declined 1.7% during the month and single-family permits dropped 4.8%. The NAHB index fell two points to 77 in April. The Leading Economic Index (LEI) expanded 0.3% in March, reflecting slower-but-still positive economic growth. Next week: Durable Goods (Tue), New Home Sales (Tue), GDP (Thu) International: China's Still Stumbling Economic Momentum China's economy started 2022 on a reasonable note as Q1 GDP rose 1.3% quarter-over-quarter, with manufacturing activity holding up quite well and services activity somewhat softer. However, March retail sales fell particularly sharply, while the ongoing impact of COVID lockdowns suggests April activity data could be even weaker. We forecast Chinese GDP growth of 4.9% for full-year 2022, but see the risk around that outlook as tilted to the downside. Next week: Australia CPI (Wed), Sweden Policy Rate (Thu), Eurozone CPI (Fri) Credit Market Insights: Student Loan Developments Are a Boost to Young Adult Balance Sheets On Tuesday, the Department of Education announced another policy designed to bring student loan borrowers… Read More »Weekly economic and financial commentary

EUR/USD struggled to preserve the overnight gains to a two-week high amid resurgent USD demand. The Fed’s hawkish outlook, elevated US bond yields, and the risk-off impulse underpinned the buck. Investors now look forward to the flash Eurozone/US PMI prints for some meaningful trading impetus. The EUR/USD pair witnessed good two-way price moves on Thursday and finally settled near the lower end of its daily trading range. The shared currency drew some support from hawkish comments by some ECB policymakers, which, along with some intraday US dollar selling, lifted the pair to a two-week high. ECB Vice President Luis de Guindos said in an interview that a rate hike is possible in the second half of the year, though the timing will depend on the economic projections. Adding to this, ECB Governing Council member Pierre Wunsch suggested a probable interest rate hike in July and anticipated that rates could be positive as soon as this year. Adding to this, Joachim Nagel, President of the Deutsche Bundesbank, noted that the ECB could raise interest rates at the start of the third quarter. The markets were quick to price in a more than 20 bps rise in July and nearly 80 bps… Read More »EUR/USD Outlook: Holds above 1.0800 pivotal support, Eurozone/US PMIs in focus

Outlook: Forget data–today Fed chief Powell speaks and is widely expected to seal the fate of the next hike at 50 bp instead of the standard 25 bp. We have to ask where we stand in the “buy the rumor, sell the fact” cycle. If everyone already expects the 50 bp, and they should, does that feed a softening of the bond selloff (which may have gone overboard)? Bloomberg notes that the Beige Book yesterday uses the word “shortages” more than 50 times for the second report in row. Growth is moderate, prices are still rising and geopolitical developments still create uncertainty and cloud the outlook. Aside from the roiling CAD, the big mover is the dollar/yen, Japan’s FinMin Suzuki is meeting TreasSec Yellen today at G20. Yesterday Suzuki said “We must take appropriate action [on the yen] while closely communicating with financial authorities of the United States and others based on G-7 and other agreements.” Well, no. We can’t see Yellen agreeing to intervention, which is the hidden message when the cause of the yen weakness is at the MoF’s choice–unless we think the MoF and the Bank of Japan are at odds, which makes US or G7 intervention… Read More »Forget data – Today Fed chief Powell speaks

It is said that those who do not learn from history are bound to repeat it. Unfortunately, it would seem that this adage is all too applicable to today’s Federal Reserve, who is raising interest rates in a belated response to skyrocketing inflation that a year ago we were told was transitory and nothing to worry about. Had the Fed learned from the painful inflationary experience of the 1970s, it would not have allowed, as it did over the past two years, for the money supply to balloon out of control and interest rates to become as negative as they are today in inflation-adjusted terms. Had the Fed learned from the painful 2008 experience with the bursting of the housing and credit bubble, it would not have allowed even greater bubbles to form in the global equity, housing and credit markets. But instead, it engaged in one of the biggest and most unprecedented money printing programs that the world has ever seen. Fast forward to today, inflation is running at a 41-year high and still accelerating. If inflation continues to surge at the current pace, then we’re only months away from a return to double-digit inflation on the same scale… Read More »Traders assess Fed policy dilemma for clues on gold next big move – What’s next? [Video]

EUR/USD – 1.0842 Euro's rally above 1.0834/37 resistance to 1.0867 in Europe on broad-based retreat in usd due to fall in U.S. yields suggests recent erratic decline has made a temporary bottom at last Thursday's near 2-year bottom at 1.0758 and stronger retracement towards 1.0890/94 is likely before another fall, below 1.0807 would head back to 1.0783, then 1.0758/62 later. On the upside, only a daily close above 1.0923 would risk stronger gain to 1.0938/45, break, 1.0965/70. Data to be released on Thursday New Zealand CPI. France business climate, EU HICP. U.S. initial jobless claims, continuing jobless claims, Philly Fed manufacturing index and EU consumer confidence.