Tag Archives: FED

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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Banks are in focus this week and ECB could change its forward guidance

The FED is expected to increase the short-term interest rate by 25 basis points this week. If the FED does not raise rates at he March FOMC meeting, it will be a big surprise for many investors. Two things to look for is unemployment and inflation.

The FED is not the only one to have a look at the rates this month. BOJ and ECB is also looking at the rate. All this is headed for an exiting week.

 

 

The U.S unemployment rate fell to 4,7 percent last month which is in line with market expectations. Labor force participation rate increased by 0,1 percentage point to 63 percent, and the number of unemployment persons was almost unchanged at 7,5 million.

Inflation rate is at near 5-year high of 2,5 percent, which is the highest since March of 2012. The inflation rate accelerated for the sixth consecutive month, mainly boosted by gasoline prices. Energy prices jumped 10,8 percent YoY and food prices declined 0,2 percent.

 

 

Watch out for inflation in February 2017 on Wednesday 15 at 12:30 PM. forecast is 2,5%.

Mario Draghi and ECB discussed whether rates can rise before QE ends. A big surprise for many analysts. Why are they doing that? The fact is that they are not satisfied with negative interest rates. This negative rates is squeezing banks’ profit margins because they are not matching the cost, and that will make if difficult for banks to lend to households and companies.

BNP Paribas has predicted the deposit rate will be increased this September, and QE is intended to run until at least the end of 2017. Some people said at least mid-2018. Anyway; analysts will scrutinize the ECB statement on Thursday to look for any changes.

BOJ will have an Interest rate decision on Thursday 16th at 03:00 AM. Forecast is -0,1 percent, which is the same as its January 2017 meeting. In January, policymakers also decided to maintain its 10-years government bond yield target around zero percent.

Economic growth forecast is 1,5 percent for 2017 fiscal year from an earlier projection of a 1,3 percent growth.

Banks are in focus this week and ECB could change its forward guidance.

 

trump100_b

 

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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FOMC will evaluate whether employment and inflation are continuing to evolve in line with their expectations

What a Trump rally. The market has added $3 trillion in value since his election during the congressional address. It`s strange to see the stock market go straight up while MSM is looking in the opposite direction.

The investor sentiment has not been this high since 1987. Consumer Confidence climbed to the highest level since 2001, and all this is good news for the economy. People have been in “heaven” since the Nov 8 election of Donald Trump.

What about Fed Chair Janet Yellen? Is a rate hike on the table?

 

 

Consumer confidence is important because people`s spending accounts for about 70 percent of the U.S economic activity. The Commerce Department reported that the U.S economy grew at a sluggish 1,9 percent from October through December. Consumer spending expanded 3 percent annual rate.

The Fed kept the target range for its federal funds steady at 0,5 percent to 0,75 percent during its February 2017 meeting. It was in line with market expectations and following a 25bps hike in December.

Interest Rate in the United States saw a record low of 0,25 percent in December of 2008, but reached an all-time high of 20 percent in March of 1980.

Two things will be very important for Fed Chair Janet Yellen at the March meeting: employment and inflation.

The recovery since the adverse shocks in recent years are now looking good, and economic developments since mid-2016 have reinforced the Committee`s confidence and on the way to reach their goals.

The unemployment rate came in at 4,8 percent in January, so the job gains is quite solid, and in line with the median FOMC participants’ estimates of its longer-run normal level. The committee currently accesses that the risk to the outlook are roughly balanced.

The job market is strong and inflation is rising toward Yellen`s target. The median assessment of FOMC participants as of last December was that a cumulative 3/4 percentage point increase in the target range for the federal funds rate would likely be appropriate over the course of this year.

In light of current economic conditions, such an increase would be consistent with the Committee`s expectations that it will raise the target range for the federal funds rate at a gradual pace and would bring the real federal funds rate close to some estimates of this current neutral level.

Janet Yellen will increase the federal funds rate based on the economic date that comes in, and the committee will evaluate whether employment and inflation are continuing to evolve in line with their expectations.

I don`t think Monetary policy is sustainable in the long run. Therefore; we will probably see a shift from monetary to fiscal policy. Say goodby to Yellen and hello to Trump.

 

 

trump100_b

 

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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Britain OUT of the European Union

The day today is historic. The British people voted for a BREXIT! The pound plummeted and Prime minister David Cameron resigns. The British people backed “Brexit” and leave by 52%.

What a day!

The pound plummeted 7 percent  on its worst day on record. Thats nearly twice as much as the big drop on 1992s Black Wednesday when the currency dropped 4,1 percent.

 

brex

 

But what`s wrong with a weaker pound? A lower pound will help the British exporters which means exporters will be more competitive and sell more not only to european countries but to the rest of the world.

On the other side, prices can start to increase and it will be more expensive for the British people, and that will be a challenge for BOE`s inflation target.

Britain is still in Europe and will always be, but Brexit means they are out of the European Union system. That`s something different.

Prime Minister David Cameron will step down in October, and what the new Prime Minister must do is to negotiate with EU and other european countries and cooperate in EEA (European Free Trade Assosiation).

They are still a country in Europe but what they want is their own sovereignty and more control over their own currency.

Just take a look at Greece. After joining EU they have been in a very difficult situation, and they can’t print their own currency because of the Euro, so only that is making it difficult for them.

This is still early on stage one but you can already see that the pound have turned up again, and that`s how it will be. The turmoil will continue.

I think that BOE have a lot of things to do right now. They will do everything they can to keep the market in balance. This will also spread to the FED and ECB.

For all I know BOE have already added liquidity to the markets and Draghi and ECB will probably follow.

June 23 will be our independence day, Farage said.

JUNE 23, 2016, WILL NEVER BE FORGOTTEN!

 

BRIT

 

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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The goal to end “too big to fail” and protect the American taxpayer by ending bailouts is only a goal

It was a great day for banks on Wednesday, while all the big banks were up, leading the financial sector as the big winner. Up +2,27%. All the banks on my screen is in green, and the most active bank shares are JPMorgan Chase & Co, Bank of America, Citigroup Inc and Wells Fargo & Co.

JPMorgan Chase & Co reported a quarterly profit that topped low market expectations. The drop in profit was the first in five quarters, but investors was focusing on the positives and pushed the bank stocks up. Not only JPMorgan Chase & Co, but also its competitors.

Banking regulators like Federal Reserve and the Federal Deposit Insurance Corporation gave a failing grade to five big banks on Wednesday, on their plans for a bankruptcy giving them until October 1 to make amends or risk sanctions.

 

bailout

 

According to Reuters, this could end with braking up the banks, and it underscore how the debate about banks being «too big to fail» continues to rage in Washington. This is the first time regulators have issued joint determinations flunking banks` plans, commonly called «living wills».

If the banks do not correct serious «deticiencies» in their plans by October, they could face stricter regulations, like higher capital requirements or limits on business activities.

The requirement for a living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis, when the U.S government spent billions of dollars on bailouts to keep big banks from failing and wrecking the U.S economy.

The plans they have are separate from the Fed`s stress tests, where banks demonstrate stability by showing how they would withstand economic shocks in hypothetical scenarios.

«The FDIC and Federal Reserve are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers,» FDIC Chairman Martin Gruenberg said in a statement.

«Today`s action is a significant step toward achieving that goal.»

Thomas Hoenig said the plans show that no firm is «capable of being resolved in an orderly fashion through bankruptcy.»

«The goal to end «too big to fail» and protect the American taxpayer by ending bailouts remains just that: only a goal.»

The biggest banks doesn`t have any plans for themselves if a new financial crisis are turning into panic and chaos, which means, if the panic hit the market today, the government need to prop up the banks called «too big to fail» if they want to avoid financial chaos.

Democratic president candidate Hillary Clinton said regulators need to break big banks apart if they don`t fix their living will problems over time. Bernie Sanders, said on Twitter that many banks have only gotten bigger since they were bailed out during the financial crisis.

One of them is obviously not Citigroup. They have cut more than 26% of its assets since its peak in 2007. Citiygroup was the largest U.S bank but is now ranked number 4 (ranked by assets).

The regulators continue to assess plans for four foreign banks labeled «systemically important» and that is Barclays PLC, Credit Suisse Group, Deutsche Bank AG, DBKGN.DE, and UBS Group AG. Citigroup`s living will did pass, but regulators noted it had «shortcomings.»

I will look for Citigroup`s report on Friday.

 

sam

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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