Do you believe it? 75bp of cumulative Fed cuts by December? ๐Ÿ‘‡

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Do you believe it? 75bp of cumulative Fed cuts by December? ๐Ÿ‘‡

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FED – In this article youโ€™ll find:

  • ๐Ÿšจ Bank of Americaย  – Is this only the first of 3 inflationary lag?
    • ๐Ÿ‘‡ PARALLELS BETWEEN WWII AND CORONAVIRUS ERAS
    • ๐Ÿ‘‡ FEDERAL GOVERNMENT DEFICITS
    • ๐Ÿ‘‡ MONEY SUPPLY HAS GONE NEGATIVE
  • ๐Ÿšจ BlackRock Institute ย – The fastest rate hiking cycle since the 1980s is causing financial cracks

    • ๐Ÿ‘‡ THE DAMAGE
    • ๐Ÿ‘‡ LABOR MARKET
    • ๐Ÿ‘‡ UNEMPLOYMENT RATE
  • ๐Ÿšจ RBC Global Asset Management – Do you believe it? 75bp of cumulative Fed cuts by December?

    • ๐Ÿ‘‡ INTEREST RATES
    • ๐Ÿ‘‡ USD DOLLAR
    • ๐Ÿ‘‡ LOOKING AHEAD
  • ๐Ÿšจ Rothschild & CO

    • ๐Ÿ‘‡ CHINA GDP
    • ๐Ÿ‘‡ ๐Ÿ‡บ๐Ÿ‡ธ US BUSINESS
    • ๐Ÿ‘‡ LABOUR MARKET

ย 

Here you can find other articles:

  1. Central Banks FED Should Now Pivot
  2. Macro Picture – US, China & EU
  3. A New Bull Market Is Ready To Start?

ย 

ENJOY THE ARTICLE

FED

๐Ÿšจ Bank of America โ€“ Is this only the first of 3 inflationary lag? ๐Ÿ‘‡

– โ€œWhile investors remain guarded and cautious near term for numerous reasons, investors should recognize and position for the coming multiyear boom in U.S.โ€

๐Ÿ‘‡ PARALLELS BETWEEN WWII AND CORONAVIRUS ERAS

– โ€œEconomists and policymakers who focus as much on history as they do on theory have a much better ability to understand the implications of monetary and fiscal policy on both economies and markets.โ€

– โ€œBoth eras have been characterized by an interventionist Fed, higher-than-average public deficits, and excessive increases in money supply, which facilitated high nominal GDP growth and eventually very high inflation.โ€

FED

– โ€œThe post-WWII era then saw slowing monetary growth leading to disinflation and even deflation, although it took three separate spikes in inflation in a decade before inflation was finally contained.โ€

– โ€œSo far, post-pandemic has seen one inflationary spike and one ongoing contraction in money supply, which has also been similarly disinflationary thus far.โ€

๐Ÿ‘‡ FEDERAL GOVERNMENT DEFICITS

– โ€œThe result of this combined activity was higher-than-typical federal government deficits (financed by central bank balance sheet expansion), money supply growth, nominal GDP growth and – eventually and predictably – inflation.โ€

– โ€œAnnual U.S. deficits as a percentage of GDP peaked at more than 26% in 1942,2 while money supply growth peaked at close to 35% in March of 1947.3 Both those statistics have remained the highest levels ever seen by a wide margin; only the post-pandemic era has produced anything remotely similar.โ€

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๐Ÿ‘‡

๐Ÿ‘‡ MONEY SUPPLY HAS GONE NEGATIVE

– โ€œAs money supply growth has now gone negative, deficits have normalized, interest rates have risen, central bank balance sheets have stopped expanding and started to contract, and bank lending standards continue to tighten, the strong disinflationary trends should continue in our opinion, and the peak of the inflationary spike should be behind us.โ€

– โ€œHowever, we would note that in two prior episodes of high inflationโ€”post-WWII and the 1970sโ€”there were three separate and distinct inflationary spikes before inflation was finally subdued.โ€

FED

๐Ÿšจ BlackRock Institute โ€“ The fastest rate hiking cycle since the 1980s is causing financial cracks ๐Ÿ‘‡

– โ€œFinancial cracks from rate hikes have led to jitters over commercial real estate.โ€

– โ€œThe Federal Reserve signaled a pause may follow last weekโ€™s rate hike. Yet jobs data showed a tight labor market. We expect a pause but no rate cuts this year.โ€

๐Ÿ‘‡ THE DAMAGE

– โ€œIn the U.S., itโ€™s now evident in the financial cracks emerging from higher interest rates on top of rate-sensitive sectors. Higher mortgage rates have hurt sales of new homes.โ€

– โ€œWe also see other warning signs, such as deteriorating CEO confidence, delayed capital spending plans and consumers depleting savings.โ€

– โ€œThe ultimate economic damage depends on how far central banks go to get inflation down. The Federal Reserve signaled a pause after hiking rates in May. But it also reiterated that persistent inflation means no rate cuts this year.โ€

FED

๐Ÿ‘‡ LABOR MARKET

– โ€œU.S. labor market is still very tight, with a worker shortage persisting. Employment growth has slowed slightly this year but is still increasing at an annualized rate of around 1.7%, not much slower than the historical average.โ€

– โ€œWeโ€™ve long said the labor force participation rate will be a key gauge of how labor supply is recovering.โ€

FED

๐Ÿ‘‡ UNEMPLOYMENT RATE

– โ€œThe unemployment rate fell to 3.4%, the lowest level since before man walked on the moon.โ€

– โ€œAnd on top of that, wage growth is not slowing. Average hourly earnings increased at an annualized rate of almost 4% in the three months to April and nearly 6% on the month.โ€

– โ€œEmployment Cost Index โ€“ the Fedโ€™s preferred measure of wage growth โ€“ was already close to 5% in Q1.โ€

FED

๐Ÿšจ RBC Global Asset Management – Do you believe it? 75bp of cumulative Fed cuts by December? ๐Ÿ‘‡

– โ€œFears of an imminent recession contrast with recent corporate earnings and consumer strength.โ€

– โ€œIn the US, the labour market remains resilient, and inflation came in below 5% for the first time in two years.โ€

FED

– โ€œIn general, we wouldnโ€™t be surprised if volatility picks up in the months ahead.โ€

– โ€œOn the data front, the US labour market remains surprisingly resilient, with unemployment falling to 3.4%, a 50-year low, while monthly nonfarm payroll additions continue to run at a healthy clip (200k+).โ€

๐Ÿ‘‡ INTEREST RATES

– โ€œUS interest rate markets currently discount approximately 75bp of cumulative Fed cuts by December.โ€

– โ€œThis may appear overly optimistic, given the tightness of the labour market and subsequent pass-through into wages and services inflation.โ€

– โ€œIn the UK, the BoE hiked rates 25bps to 4.5% as expected, with revisions to the growth forecast ruling out a recession in the near-term. However, with headline inflation still above 10%, real rates are still in deeply negative territory.โ€

FED

๐Ÿ‘‡ USD DOLLAR

– โ€œIn FX, the dollar has been stable near the lows of the year. However, the story of the week has been continued compression of volatility in FX, with the relentless hunt for carry unabated.โ€

– โ€œWe remain skeptical of this โ€“ the forward-looking returns for carry tend to be negative when volatility is this low, most carry currencies screen poorly on valuations and are lacking any risk premium.โ€

๐Ÿ‘‡ LOOKING AHEAD

– โ€œOn the other hand, recent economic data is displaying strength, and the narrative could easily shift in the direction of the Fed needing to do more on rates to get inflation under control.โ€

– โ€œWe therefore have low conviction in the macro backdrop but are biased to expect more volatility and a period of risk-off in markets, as potential risks come to the fore.โ€

๐Ÿšจ ROTHSCHILD & CO

๐Ÿ‘‡ CHINA GDP

– โ€œChinaโ€™s GDP expanded 2.2% q/q in Q1-23 following 0.6% in Q4-22, supported mainly by the strong rebound in householdsโ€™ consumption.โ€

– โ€œSpending on services, particularly traveling, is set to remain strong, although uncertainty remains elevated on other categories as recent indicators have provided conflicting signals about the recovery.โ€

FED

๐Ÿ‘‡ ๐Ÿ‡บ๐Ÿ‡ธ US BUSINESS

– โ€œUS business investment remained weak and almost all the rebound in consumption came almost exclusively from a strong reading in January.โ€

– โ€œInvestors remain optimistic regarding the outlook as the S&P Global business confidence index improved once again in April to a 11-month high despite the recent banking stress, suggesting that the Eurozone economic activity gained momentum in early Q2.โ€

๐Ÿ‘‡ LABOUR MARKET

– โ€œLabour markets remain tight in most countries, in part because demand is robust, but also reflecting a slow post-pandemic recovery in supply, with fewer older workers participating in the labour force.โ€

– โ€œIn that context, cost pressures from wages not only remain elevated in most advanced economies, but some measures are showing signs of a re-acceleration.โ€

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.

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