Englund

Something even bigger than AI and the Trump effect is at work One answer is that the easy money era ended only in part. It had always rested on a growing web of government and central bank support including market rescues, corporate and bank bailouts, constant stimulus and, of course, record low rates.  Only very low rates have gone away. The rest of the culture continues to backstop the basic faith of market speculators that nothing will be allowed to go wrong. The longer the bull run lasts, the more investors feel emboldened to buy any dip.   The market suffered brief setbacks on news of a serious Chinese challenge to American AI dominance and of Trump’s tariffs.  Then retail investors rushed in to buy stocks like never before.  Of the five biggest days for retail buying this decade, four erupted in the last five weeks. To keep growth alive during the pandemic, the Fed injected massive amounts of liquidity into the system. By some measures a lot of it is still...

  RE: Tyskland är ett skolboksexempel (eller hur Klas Eklund)  på att det kan hända oväntade saker; stopp i gasflödet från Ryssland,  elbilar från Kina krossar den tyska bildindustrin. Då hade det varit bra att kunna låta D-Marken flyta neråt.  Tyskland ville inte ha euron, men blev tvingade. Tysk debatt om EU och EMU German debate about EU and EMU Tyskarna har dessutom grundlagsfäst sitt överskottsmål. De har varken penning- eller finanspolitik till sitt förfogande. https://englundmacro.blogspot.com/2024/12/merzs-manifesto.html Government-bond yields have surged across the developed world in recent weeks, jarring stocks and pressuring indebted countries.  The worldwide bond rout threatens to complicate the efforts of central banks that have been cutting short-term interest rates.  Rate cuts aim to lower borrowing costs for consumers and businesses. But the rise in yields is instead making it costlier to borrow, “tightening financial conditions” in Wal...

  https://www.ft.com/content/aa6c0013-dbde-4fdc-a673-55e4f2ea76e0 Markets raise bets policymakers will lower rates next week. Loretta Mester, a former president of the Cleveland Fed. “However, they’ve got to be rethinking about next year, because it does look now that the inflation progress has stalled out a bit.” https://www.bloomberg.com/news/articles/2024-12-11/inflation-gives-fed-green-light-for-december-yellow-for-2025 USA:s inflationstakt mätt som KPI uppgick till 2,7 procent under november efter 2,6 procent i oktober.  Kärninflationen exklusive mat och energi, låg kvar på oktobers nivåer på 3,3 procent Sedan i somras har Fed hävdat att inflationsnedgången fortskrider och arbetsmarknaden försvagas till den grad att det motiverar räntesänkningar.  Med onsdagens novemberdata blir det dock allt svårare att försvara den linjen. KPI-inflationens uppåtkrok kan Fed möjligen avfärda som ännu ett väntat hack i kurvan på den enträgna resan nedåt. Men kärninflationen har ...

The market has loosened financial conditions in the last week by bidding up stocks, while tightening them by raising bond yields.  There are any number of ways to measure exactly how tight conditions are, and the current bout of speculative exuberance makes it hard to believe that they’re very restrictive. John Authers Bloomberg 14 november 2024 https://www.bloomberg.com/opinion/articles/2024-11-14/inflation-stops-falling-and-needs-subtlety-it-s-getting-trump https://www.bloomberg.com/news/newsletters/2024-11-13/us-inflation-keeps-steady-as-fed-looks-to-avoid-reversal Many economists  warned  plans to enact sweeping tariffs and deport millions of immigrants risk reigniting inflationary pressures when the worst bout for a generation has yet to be fully tamed. The economists who support Trump’s economic agenda — figures such as Stephen Moore, Arthur Laffer and Larry Kudlow — believe his tax cuts will boost demand. Their impact on growth will raise tax revenues, shrinking th...

  As the Fed starts cutting, that’s making some on Wall Street nervous about a potential reacceleration of inflation. The so-called neutral rate of interest — or “r star,” as economists call it — is the standard against which the Federal Reserve’s interest-rate policy is judged as either “tight” or “loose.” Because the neutral rate is a theoretical concept, nobody can say for certain exactly where it lies. Since the start of the pandemic, senior Fed officials have espoused a wider range of opinions about where they see the neutral rate.  Chief among their concerns is the possibility that the neutral rate might be higher than the Fed expects. If this turns out to be true, the central bank could inadvertently lower interest rates too aggressively, potentially contributing to another wave of inflation.   Indeed, some market-based barometers, like the spread between the 5-year Treasury note yield 3.893% and that of its inflation-protected counterpart, appear to be already pic...

Richard Koo chief economist of Nomura Research Institute in Japan is famous, at least among economists, for coining the term “balance sheet recession”.  I now claim to coin the term "balance sheet boom". When shares och house prices rise many, but not all, are, or at least feel, richer. They feel free to choose and free to spend. That may go on longer than you can stay solvent.  Rolf Englund 7 October 2024 Why the bulls are running and the consumers are buying Englund blogg 28 June 2023 https://englundmacro.blogspot.com/2023/06/why-bulls-are-running-and-consumers-are.html Richard Koo is famous, at least among economists, for coining the term “balance sheet recession”.  https://englundmacro.blogspot.com/2024/10/weakening-dollar-is-good-idea.html Tillbaka till Wall Street och Stockholm 7 oktober 2024 https://englundmacro.blogspot.com/2024/10/wall-street-och-stockholm-7-oktober-2024.html

  First, the economy retains considerable forward momentum. Second,  Although the unemployment rate has risen to 4.2% from a low of 3.4% in 2023, the increase has mainly been driven by rapid growth in the labor force rather than permanent job layoffs. Third, the Sahm rule may not be as ironclad as historical experience suggests. Fourth, although monetary policy remains tight by almost anyone’s standard, financial conditions have eased massively over the past year. Stock prices have soared to record highs, bond yields have fallen, and credit spreads have tightened. A soft landing implies somewhat higher bond yields  As I wrote more than a year ago, fair value for the 10-year Treasury note yield is probably around 4.5%.  Goodbye to the Bull Market for US Treasury Bonds The paradigm has shifted. Higher yields are back. 22 augusti 2023 https://englundmacro.blogspot.com/2023/08/bill-dudley-strongly-suspects-that-bond.html https://www.bloomberg.com/opinion/articles/2023-08...

  Tesla i täten på Wall Street – index slog nya rekord https://www.di.se/live/tesla-i-taten-pa-wall-street-index-slog-nya-rekord/ S&P 500 hits all-time high to extend this year’s jump to 20% Jobless claims fall to lowest since May in solid labor market Wall Street traders betting the Federal Reserve will be able to engineer a soft landing Bloomberg 19 september 2024 at 20:21 CEST https://www.bloomberg.com/news/articles/2024-09-18/stocks-bonds-rangebound-as-traders-digest-fed-cut-markets-wrap The Federal Reserve Pivots   Jerome Powell says the economy is strong but still cuts rates by 50 basis points. These contradictory signals highlight the risk the Fed is taking with its new rate-cutting path. Mr. Powell’s bet seems to be that inflation is sufficiently whipped that the Fed can ease aggressively now to forestall a slowdown that hasn’t arrived. He may be right. But it’s notable that the FOMC registered its first dissent since June 2022 If Mr. Powell is wrong about inf...

10-year Treasury yields, a benchmark for mortgages, actually went up. The key question for the bond market is where rates will land once all is said and done.  The median respondent among Federal Reserve Board members and Federal Reserve Bank presidents now sees the “longer-run” federal funds rate landing at around 2.9%, up from about 2.8% in its previous quarterly update. For years, policymakers thought that “neutral” was around 2.5% (or 0.5% in “real” terms, adjusting for inflation at 2%). If you could raise rates from near zero to 5.25%-5.5% and still have gross domestic product expanding at around 2.5% and an unemployment rate below 4%, perhaps policy wasn’t as “restrictive” as people previously thought. Powell: Intuitively many, many people would say we’re probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates… and it looked like the neutral rate might even be negative… I...

  https://fred.stlouisfed.org/series/NFCI National Financial Conditions Index: About the NFCI - Federal Reserve Bank of Chicago (chicagofed.org)

Federal Reserve Bank of Richmond President Thomas Barkin said the inflation battle still hasn’t been won, and the US economy is likely to remain resilient as long as unemployment remains low and asset valuations high. “The US economy, particularly its consumer, has been much more resilient to rate increases than most expected and is likely to stay so as long as valuations remain elevated, and unemployment remains low,” “given the remarkable strength we are seeing in the economy,” he said he is open to the idea that the longer run rate that keeps supply and demand in balance “has shifted up somewhat” and that policy may not be as restrictive as perceived. Bloomberg 28 June 2024 https://www.bloomberg.com/news/articles/2024-06-28/barkin-says-us-economy-is-withstanding-fed-s-battle-on-inflation  Bill Dudley: I think r* is a lot higher than the Fed recognizes https://englundmacro.blogspot.com/2024/05/bill-dudley-i-think-r-is-lot-higher.html   Desperately Seeking Restrictive https:/...

Home prices in the 20 major U.S. metro markets were up 7.2% in the last 12 months ending in April.  That’s down from an increase of 7.5% the previous month. MarketWatch 25 June 2024 https://www.marketwatch.com/story/u-s-home-prices-set-new-record-high-but-growth-is-slowing-case-shiller-says-319725eb

Former Treasury Secretary Summers (born 1954) added that the Fed is underestimating the long-term level of interest rates, known as the neutral rate, that will be necessary to keep prices from rising too quickly. ”My best guess is [the Fed] is badly wrong that the neutral interest rate is 2.5%,” he said.  “My guess is that the neutral rate is 4.5%.”  Fed officials raised their estimate of the neutral rate to 2.8% earlier this month. Traders in the federal-funds futures market see a nearly 70% chance of more than one interest-rate cut before the end of 2025 The Fed’s benchmark interest rate is currently at 5.25% to 5.5%. According to Summers, that monetary policy is not very restrictive and investors shouldn’t expect interest rates to fall significantly from here. MarketWatch 24 June 2024 https://www.marketwatch.com/story/larry-summers-says-the-fed-and-investors-are-badly-wrong-on-inflations-path-24537e57 High Rates Maybe Forever https://englundmacro.blogspot.com/2024/06/high-r...

Potentially limiting the central bank’s ability to cut and thus setting up a headwind for bonds is the growing view in markets that the economy’s so-called neutral rate is much higher than policymakers are currently projecting. “The significance is that when the economy inevitably decelerates, there will be fewer rate cuts and interest rates over the next ten years or so could be higher than they were over the last ten years,”  said Troy Ludtka, senior US economist at SMBC Nikko Securities America, Inc. Forward contracts referencing the five-year interest rate in the next five years — a proxy for the market’s view of where US rates might end up — have stalled at 3.6%.  While that’s down from last year’s peak of 4.5%, it’s still more than one full percentage higher than the average over the past decade and above the Fed’s own estimate of 2.75%. If the market is right that the neutral rate – which cannot be observed in real time because it’s subject to too many forces – has perm...

Traders recalibrate rate-cut wagers Easing financial conditions seen ‘neutralizing’ Fed tightening Stocks and bonds staged their worst synchronized drop of the year on Monday and Tuesday, while Thursday saw the biggest reversal of an S&P 500 rally since August.  An exchange-traded fund tracking long-dated Treasuries suffered its worst week since October as 10-year yields reached the highest in more than four months. Torsten Slok, the Apollo Global Management economist has repeatedly warned that gains in asset prices are working against central bankers’ goals. “The tailwind from easing financial conditions is overwhelming and neutralizing the rate hikes from last year,” Slok, who in March predicted no rate cuts this year, said in a phone interview.  “It’s not surprising that the economy is re-accelerating and, therefore, rates will have to stay higher.” Brent crude climbing above $90 a barrel.  Minneapolis Fed President Neel Kashkari managed to raise eyebrows by saying...

An increasingly bullish outlook is on a collision course with Fed policy goals that still demand tighter financial conditions. The complications risk leading to longer hawkishness. As in many other things in life, markets can pick up momentum and become unstoppable. That seems to be happening now.  The market, after all, can to an extent create its own reality.  John Authers 30 januari 2023 https://englundmacro.blogspot.com/2023/01/market-versus-real-world.html Recession? Growth Ended Up Accelerating in 2023 Economy expanded 3.1% from a year earlier due to strong consumer spending and hiring The final three months of the year looked a lot like the soft landing Fed officials are seeking to achieve.  Growth was strong, employers added nearly a half-million jobs and inflation cooled to an annualized 1.7% rate, below the Fed’s 2% target. Wall Street Journal 25 January 2024 https://www.wsj.com/economy/gdp-us-economy-fourth-quarter-2023-9fc372f0 The prevailing belief is that th...