Tag Archives: deflation

by | September 13, 2022 · 7:44 pm

Nasdaq plummeted more than 5%

What a day in the stock market. Nasdaq plummeted 5,16%. That`s 632,84 points. Dow Jones and S&P 500 were also sharply down, followed by cryptos like Bitcoin. They all went down because the annual inflation rate in the US eased for a second straight month to 8,3% in August of 2022.

This is the lowest number in four months, so why did investors have so much panic? The rate is down from 8,5% in July. But it`s down from 9,1% in June, so, it’s on the way down. For all I know, it will continue the same path, and probably end up in the opposite direction; deflation in the long run.

The energy index increased by 23,8% (32,9% in July). Gasoline increased 25,6% (44% in July). Fuel oil increased 68,8% (75,9% in July).

Photo by Wendy Wei on Pexels.com

Natural gas increased 33% vs 30,5%, and electricity was at the highest since August 1981, at 15,8%. Prices for food rose by 11,4%, and that is the most since 1979. The shelter is up 6,2%, which is the most since 1984.

CPI, which excludes volatile energy and food prices, increased 6,3% in a year. This is the most since March, and up markedly from 5,9% in June and July.

The Federal Reserve has done a lot to push down inflation because inflation over time could have dramatic consequences for consumers. The Fed has been hawkish when it comes to interest rate hikes this year.

They try to make it expensive for consumers to borrow, and the interest rate hikes will affect consumers’ interest rates like credit cards, loans, and mortgage rates.

CPI measures changes in the cost of consumer goods and is a key indicator of just how bad inflation is.

Economists anticipated a lower CPI in August, but the index rose 0,1% from the previous month and 8,3 on an annual basis. More rate hikes from the Fed will force consumers to change their lifestyles in the future.

The Fed looks at CPI when deciding whether to raise rates or not. Experts claim that we must expect the Fed to continue to be very aggressive when it comes to rate hikes. So, fasten your seat belts.

So far this year, the central bank has already raised rates by 225 basis points, and many investors are waiting for another 75 basis point rate hike at their meeting next week.

The cost of living is increasing. Higher electricity bills, food, gasoline, and gas prices are making it difficult for many, and it isn`t easy to borrow either. The cost of borrowing is also increasing. On the other side; the rate on your saving account is also increasing.

Experts predict that we could see many more months of rampant inflation.

The Fed funds futures are pricing in a 36% chance that the bank will raise its benchmark rate by a full percentage point. Nomura forecasted a 100 basis point hike in September.

Investors don`t like Fed`s hawkishness, and they are worried that the Fed`s inflation fight will bring in a recession. On the other hand; the Fed is also ramping up the unwinding of its balance sheet to $95 billion per month.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shinybull.com. The author has made every effort to ensure the accuracy of the information provided; however, neither Shinybull.com nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities, or other financial instruments. Shinybull.com and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | August 1, 2018 · 9:35 pm

The Fed kept the interest rate unchanged at 1,75 – 2% while Switzerland have negative interest rate at -0,75

Federal Reserve Board Chairman Jerome Powell announced on Wednesday that it kept the benchmark interest rate unchanged. The statement comes after a two-day meeting of the FOMC, which decides on monetary policy.

Powell said the job market would remain strong and inflation would stay around the 2 percent target for “several years.” This is great for the U.S because it gives the Fed some tools to use if the trouble are coming back. But what about the rest of the world? Are they healthy?

The picture is different in Switzerland. The Swiss National Bank kept its benchmark three-month Libor at -0,75 percent on June 21st, 2018. Interest rate in Switzerland reached an all time low of -0,75 percent in January of 2015, and it`s still at the same low-level. But they are not alone.

Denmark followed Switzerland in 2015 and dropped the interest rate to -0,75 only a month after them. The Danish central bank follows the path set by the ECB and the key rate will be raised or lowered when the ECB changes the refinance rate.

The Danish central bank`s main policy aim to hold the euro`s exchange rate within 2,25 percent either above or below 7,46038 kroner in an effort to keep inflation low and provide stability for exporter. Now the Danish rate is -0,65.

Sweden joined the negative interest club, and the central bank of Sweden held its benchmark interest rate at -0,5 percent on July 3rd, as widely expected, saying monetary policy needs to continue to be expansionary for inflation to remain close to target despite strong economic activity.

Japan is the last country in the world to have negative interest rate. They reached an all time low of -0,1 percent in July this year. The BOJ vowed to keep rate extremely low for extended period of time and opted for flexible bond buying at its July 2018 meeting.

In addition, Japan`s policymakers left its key short-term interest rate unchanged at -0,1 percent and kept its 10-year government bond yield target around 0 percent.

In other words; you are lending your money to governments and you are paying them interest for that, which mean it`s cheaper to put your money under your mattress. But that strategy can be very risky.

The goal is to make people spend money rather than pay a fee to keep it safe. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest. This is how you make growth.

During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand, which leads to prices falling even further. This again will lead to a slowdown in production and output which means higher unemployment.

Negative interest rates can be considered a last-ditch effort to boost economic growth, which means when all else has proved ineffective and may have failed. 21 countries like Spain, Italy, Greece, France, Finland and Malta to name a few, are holding its interest rate at 0,00. The Euro zone is joining the club.

In 2014, the ECB instituted a negative interest rate that only applied to bank deposits intended to prevent the Euro zone from falling into a deflationary spiral.

The ECB held its benchmark refinancing rate at 0 percent on July 26th and reiterated that the monthly pace of the net asset purchase will be reduced to €15 billion from September to December 2018, and will then end.

The ECB expect the interest rate to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to 2 percent over the medium term.

The risk surrounding the euro area growth outlook can still be assessed as broadly balanced. Uncertainties related to global factors, notably the threat of protectionism, remain prominent.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

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by | March 24, 2017 · 11:59 pm

The FED`s “Adverse Scenario” and the major shift in the economy

The stock market has been in a euphoric rally since Donald Trump won the election in November last year. This is something that Janet Yellen and the FED has monitored. Not only that. They also monitored strong economic data which have strengthened the case for a rate hike.

As you may know, the FED raised the rates a few days ago, and normally after a rate hike, the stock market drops. Thats the case right now, but the market didnt fall much. Janet Yellen said the FED will continue to raise the rates. What will happen then?

The FED came out with Scenarios for annual stress test required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule on February 10, 2017. It is just a forecast; an Armageddon forecast, which is called «Adverse Scenario» Report, and the scenarios are not forecasts of the FED.

The adverse and severely adverse scenarios describe hypothetical sets of conditions designed to assess the strength of banking organizations and their resilience to adverse economic environments. The baseline scenario follows a profile similar to the average projections from a survey of economic forecasters.

We must be prepared for higher long-term interest rates. What is that suppose to mean? First of all; that is good for banks with retail customers, simply because retail customers usually have checking accounts with zero interest on them.

So, if the rates rise, the spread in the banks rise simply because the banks will make more on their lending. About 2,000 banks has disappeared the last seven years, which means the competition among the rest is not that big anymore.

We can also see a steeper yield curve and regionally concentrated episodes of deflation. More pronounced in Japan, but less severe in the Euro zone and Asia and absent in the UK and US.

This is the major shifts we will see in the FED`s «Adverse Scenario» for 2017, and U.S banks will be stress-tested again. The apocalyptic scenario means that the level of U.S real GDP will decline in the first quarter of this year.

The US economy advanced an annualized 1,9 percent on quarter in the three months of 2016, slowing from a 3,5 percent growth in the previous period and matching earlier estimates. Consumer spending rose faster than anticipated while business investment was revised lower. Last year, the GDP expanded 1,6 percent, which is the lowest since 2011.

Check out next GDP number at 2017-03-30 at 12:30 PM.

In the scenario, the unemployment rate increases to 10 percent, by the third quarter of 2018, and short-term treasury rates fall and remain near zero. House prices will also decline by about 25 – 35 percent, through the first quarter of 2019, and so will equity prices.

In the same scenario, we will se a slowdown in Asia, severe recessions and the dollar will appreciate against euro, the pound sterling and the currencies of developing Asia.

I think the next big think to look at now is the election in France. If Le Pen and the populist wins, it can turn things upside down, and start a new international crisis. Until then, trade in small caps are profitable when rates rise, and higher rates doesn`t stop tech stocks like Alphabet, Apple and Amazon from surging. This is the bull market that everyone hates.

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | March 11, 2016 · 11:59 pm

Very important week

Next week will be exiting. The earnings season is at the end and investors focus now will be on a flood of data coming in. It all starts on monday March 14 were the Bank of Japan will announce its policies.

Bank of Japan Gov. Haruhiko Kuroda is in a special situation. Just like ECBs Mario Draghi, he talked about his «bazooka» and said he wanted to do whatever it takes to get Japans economy back on track to a stable growth.

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The answer so far is negative interest rate, and they started charging commercial banks 0,1% interest on some reserves last month. That lowered the borrowing cost, but on the other hand, it made some confusion about the effects on Japan`s savers.

Haruhiko Kuroda has been called to parliament for questioning many times and more than any other central bank chief during the same period. Japanese 10-year Government Bonds traded at -0,20% for the first time in history and dropped farther into negative territory.

Negative rate is also seen in Sweden, Denmark and Switzerland. Sweden`s goal is to raise the inflation. The goal in Denmark and Switzerland is to prevent the currency to raise too much.

Negative rates can be the new normal because none of them turn this situation into a strong economic growth. So, What about America?

All eyes will be on Federal Reserve Chair Janet Yellen and the Federal Open Market Committee (FOMC). The FOMC meeting will kick off on Tuesday 15, and the Fed`s interest rate decision is the highlight on Wednesday 16, with the 2 p.m ET announcement followed by a 2,30 press conference with Fed Chair Janet Yellen.

According to Wall Street Journal`s Jon Hilsenrath who is the mouthpiece of the Fed, the central bank will hold off raising rates this month, but will leave the door open for a hike in April or June this year.

U.S Consumer prices went up 1,4% YoY in January of 2016, and the inflation rate accelerated for the fourth straight month which is very impressive. CPI for February 2016 is scheduled to be released on Wednesday 16.

The European Central Bank (ECB) followed BOJ, and increased QE by 20 billion euros per month on thursday. Not only that. They also lowered interest rates, which is an unexpectedly strong move. The ECB increased its monthly bond buying from 60 to 80 billion euros and drove commercial deposit rates from -0,30% to -0,40% and cut a main refinance rate from 0,05% to 0,00%.

As you may know, many people are very angry. Not only in Europe, but also in America. The middle class is wiped out and businessman Donald Trump knows that. He doesn`t like what he see and want to do something about it; Make America great again.

The battle for the White House continues, and next week`s Ohio and Florida primaries would give Donald Trump the knockout blow necessary to capture the GOP nomination. Anti-Trump groups are spending millions of dollar on TV ads to attack him. Is that enough to stop him? If not, it will be a short way left to the White House.

Very important week.

 

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | March 3, 2015 · 9:48 pm

Inflation and Gold

Investors buy gold because they think that gold is a hedge against inflation. The value of the paper currency falls in terms of the goods and services that it can buy and inflation goes in the opposite direction; up.

Investors love gold when inflation is high and as you may know, gold has a direct relationship with inflation. So when inflation goes up so does the demand for gold. Imminent hyper inflation was expected during the QE program, but that is not the reality right now.

You can track inflation using the Consumer Price Index (CPI). This index measures how the price of a basket of consumer goods and services changes. CPI will give you a picture of the increase in the level of prices.

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This data is released by the U.S Bureau of Labor statistics on a monthly basis. U.S inflation rate is -0,09%, (released Feb 26, 2015), compared to 0,76% in December and 1,58% last year. This is lower than the long-term average of 3,32%. Down -111,8%.

Inflation fell in January for a third straight month as U.S consumers continued to spend less on gas, food prices flattened and as costs retreated for new vehicles,used cars and trucks, household furnishings and operations, airline fares, alcohol and tobacco. U.S inflation turned negative for the first time since 2009.

The CPI measures what American pays for everything from cloths, airline tickets, fruits and vegetables to cars. Declines were again led by energy as prices at the pump tumbled about 19%. Gasoline prices have plunged 35% over the past 12 months.

A slower pace of inflation means consumers can buy more with their money, but a sustained decline over and extended period (deflation), can wreak havoc on an economy. Falling energy prices are beginning to filter down into other areas.

Core US inflation advanced 1,6% over the last 12 months, and the core 12-month reading is the benchmark inflation figure monitored by the Federal Open Market Committee (FOMC) as it helps in deciding where to set the key interests rate.

«We think inflation is going to move lower before it moves higher. Declining oil prices have had a very major influence,» Fed Chairwoman Janet Yellen said in a testimony.

The current level remains below the Fed`s 2% annual inflation target. In written remarks read to Congress, Janet Yellen stated:

“The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.”

Consumer Price Index data for February inflation and the annual period is scheduled for release on March 24, 2015.

 

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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