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Economy

Investors look to U.S. inflation measures, eye bond gyrations as taper looms

By Saqib Iqbal Ahmed

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Investors look to U.S. inflation measures, eye bond gyrations as taper looms
© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021. Kevin Dietsch/Pool via REUTERS

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Investors are watching everything from bond volatility to inflation measures as they try to gauge how an expected unwind of the U.S. Federal Reserve’s easy money policies will reverberate throughout markets.

Most market participants believe the Fed will announce the timing of the tapering of its $120 billion per month U.S. government-backed bond buying program at the conclusion of its November meeting on Wednesday.

(GRAPHIC: Fed’s balance sheet – https://fingfx.thomsonreuters.com/gfx/mkt/zdvxorlyrpx/Pasted%20image%201635797906162.png)

The central bank has gone out of its way to prepare investors for the start of a taper and so far avoided the sort of gyrations that hit markets in 2013, after then-Fed chief Ben Bernanke alluded to the policymaker’s thinking on plans for pulling back its monetary support in an appearance before lawmakers. Bond yields rocketed higher and stock prices dropped during the so-called “taper tantrum” that year. Yields drifted lower while stocks rose, however, as the Fed gradually unwound its $85 billion in government bond buying in 2014.

Shifting expectations of how aggressively the Fed will need to move this time around in order to tamp down surging inflation have already caused ructions in the rates on shorter-dated Treasury securities, even as stocks have marched to fresh highs.

“You can’t anticipate what it means when a central bank is suddenly no longer buying a $120 billion in securities each month,” said Bryce Doty, senior portfolio manager at Sit Investment Associates. “But once it actually stops, there is an impact.”

Here are various metrics investors are watching.

(GRAPHIC: Breakeven inflation rates – https://fingfx.thomsonreuters.com/gfx/mkt/znpnezydkvl/Pasted%20image%201635798624668.png)

INFLATION

The 10-year breakeven rate – which shows inflation expectations by measuring the yield spread between 10-year Treasury Inflation Protected Securities, or TIPS, and – stands near multi-year highs, suggesting investors increasingly believe the current bout of inflation may last longer than previously anticipated.

Signs that the central bank is backpedaling on its view of inflation as transitory could ramp up expectations for how quickly policymakers raise rates.

“We are concerned that the central bank could make a policy error and raise rates sooner than they should,” said Tom Martin, senior portfolio manager at Globalt Investments.

The Fed’s most recent “dot plot” depicting policymakers’ rate-hike expectations show about half seeing the Fed lifting rates by the end of next year, with the other half expecting liftoff by the end of 2023.

(GRAPHIC: S&P dividend yield vs 10-year U.S. Treasuries – https://fingfx.thomsonreuters.com/gfx/mkt/myvmngdmmpr/Pasted%20image%201635796129587.png)

DIVIDEND YIELD

The gap between yields offered by the benchmark 10-year Treasury note and the dividend yield on the recently opened to its widest since May 2019, potentially dimming the allure of some stocks to income-seeking investors.

The yield on 10-year Treasury bonds is already up about 67 basis points from this year’s low and may rise further as investors factor in interest rate increases from the Fed.

“It really means that interest rates are going to be teed up in the future for increases and that is going to have an effect on stock prices,” Stephen Tally, chief operating officer at Leo Wealth said.

(GRAPHIC: Bonds on the move – https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgxrmgpb/Pasted%20image%201635796495338.png)

VOLATILITY

Near-zero interest rates and massive monthly bond buying helped soothe nerves and dampen volatility as global markets grappled with the pandemic.

Some of that volatility is now creeping back in as investors adjust their positioning for a Fed taper and eventual rate increases. In bond markets, investors’ expectations for Treasury market gyrations as measured by the ICE (NYSE:) BofAML U.S. Bond Market Option Volatility Estimate Index stand near post pandemic highs.

Ebbing central bank support and the prospect of policy tightening “puts more importance on effectively every major economic data point that comes out,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.

(GRAPHIC: Rising reverse repo – https://graphics.reuters.com/USA-FED/znpnezrrmvl/chart.png)

REPO FACILITY

Some investors will be watching the usage of the Fed’s overnight reverse repurchase agreement facility as a proxy for how less accommodative monetary policy is affecting liquidity in the market.

The facility lets counterparties like money-market funds place cash with the central bank. The volume of the Fed’s overnight reverse repurchase agreement facility recently hit a record $1.6 trillion.

The robust volume suggests markets are flush with cash and less vulnerable to dislocations. Signs that liquidity is on a downtrend as the Fed withdraws support could bode ill for riskier assets, analysts said.

“I consider the repo facility the canary in the coalmine,” said Bryce Doty of Sit Investment Associates.

Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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exports South Korea

South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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Economy

The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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a humanitarian crisis

Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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Economy

Average house prices in the UK fell 1.4% in November

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average house prices in the uk

Average house prices in the UK fell 1.4% in the previous month in November to 263,788 thousand pounds (about $319,000), according to the British mortgage company Nationwide Building Society.

The decline was recorded at the end of the second consecutive month and was the most significant in almost 2.5 years – since June 2020. Analysts on average had forecast a decline of only 0.3%, according to Trading Economics.

Are house prices in the UK going to fall even more?

Residential real estate prices in November compared to the same month last year increased by 4.4%. At the same time, experts expected a larger increase of 5.8%. The growth rate slowed down significantly compared with 7.2% in October. Because of the difficult economic situation, British investors are investing in other instruments. The Microsoft price chart, for example, is showing potential for growth, so many are interested in the U.S. stock market. 

“The market looks set to remain under pressure in the coming quarters. Inflation will remain high for some time, and interest rates are likely to continue to rise,” believes Nationwide Senior Economist Robert Gardner. – The outlook is unclear, and much will depend on how the overall economy behaves, but a relatively soft landing is still possible.”

Earlier we reported that Sanctions Circumvention was included in the EU’s list of criminal offenses.

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