Fundamental News Facts for 17th April, 2024

Fundamental News Facts for 17th April, 2024

[Quick Facts]

1. WSJ’s Timiraos says Powell dials back expectations on rate cuts.
   2. Israel has decided on how to strike back at Iran.
   3. The U.S. may release more SPR oil to keep gas prices low.
   4. Bailey hints the BOE may cut rates before the Fed, Hunt had also quoted his views.
   5. Powell dampens rate-cut expectations again.
   6. Lagarde says rates will be cut soon unless there are major shocks.
   7. Jefferson says the policy will remain restrictive for longer if necessary.
   8. IMF raises its outlook for global growth this year to 3.2%.

Powell’s View on Rate Cuts: 

Jerome Powell, the head of the Federal Reserve, has said that because inflation (the rate at which prices are rising) has been strong, the Fed might not be able to reduce interest rates this year unless the economy starts to slow down. This is a change in the Fed’s previous thinking. Powell also said that if inflation stays above 2%, the Fed might keep interest rates high for a longer time. This suggests that the Fed is unlikely to increase rates further, even though inflation is stronger than expected.

Israel’s Plan Against Iran: 

The Israel Defense Forces have made a plan to retaliate against Iran and its allies, but they haven’t decided when to put this plan into action. This shows that the leaders of Israel are determined to fight back. The head of the IDF, Herzi Halevi, has suggested that there’s no rush to counterattack. He said they’re working on a big plan that will allow people to live almost normally during the week of Passover. This suggests that a major attack is not likely to happen soon and could be delayed.
Iran’s missile attack on Israel on April 13th caused a stir in the financial markets. This attack was a response to Israel’s bombing of the Iranian Embassy in Syria on April 1st. Israeli Prime Minister Benjamin Netanyahu’s quick response to the attack suggested that Israel was likely to retaliate. The conflict between Iran and Israel seemed to be escalating, shifting the main conflict in the Middle East from “Israel and Hamas” to “Iran and Israel”.
The world had been waiting for Iran’s response to Israel’s bombing of its embassy in Syria. As the period from March 11th to April 10th was the Iranian month of Ramadan, Iran had to delay its response to avoid breaking any rules.
After April 10th, which marks the start of Eid al-Fitr, Iranian religious leader Ali Khamenei stated that the “Zionist attack on the Iranian diplomatic embassy is a major mistake, and they should be punished for their actions”. This indicated that Iran was planning to retaliate.
On the same day, Israeli Prime Minister Benjamin Netanyahu responded to Iran’s statement, warning that “whoever harms us, we will harm them”. This suggested that if Iran retaliated, Israel would counterattack.
Now, Iran has retaliated. Given Israel’s previous statements and recent actions, a counterattack from Israel seems inevitable. It’s likely that Israel will target Iran’s hinterland. Reports suggest that the Israel Defense Forces and Mossad have approved a counterattack on Iran’s hinterland if Israel is attacked by Iran.
However, the question arises as to why Israel bombed the Iranian embassy in Syria in the first place. One theory is that Israel’s real goal was to provoke Iran into retaliating, giving Israel an excuse to destroy Iran’s nuclear facilities.
In the Middle East, Iran is the only country capable of posing a significant threat to Israel because it has nuclear facilities that could potentially be developed into nuclear weapons. As Israel also possesses nuclear weapons, non-nuclear Arab countries do not pose a significant threat. If Israel were to “destroy” Iran’s nuclear facilities under the guise of retaliation, it would enhance Israel’s security and status in the long term.
From this perspective, it seems almost certain that Israel will retaliate following the weekend’s attack. This raises the question of how Iran would respond if its nuclear facilities were attacked.
Since Israel possesses nuclear weapons, Iran’s first response would likely be to blockade the Strait of Hormuz, as the Houthis have done. Iran may then announce that only cruise ships from friendly countries will be allowed to pass through.
Iran’s control of the Strait of Hormuz, through which about one-third of the world’s crude oil is shipped, is a veiled threat to the United States and the West. This would significantly increase the cost of crude oil in these countries, potentially leading to considerable problems or even oil wars.
According to Russian estimates, if Iran were to block the Strait of Hormuz, global oil prices would immediately skyrocket to over $400 per barrel. This would cause inflation in Europe, the United States, and Japan to collapse, and the global financial markets would experience significant fluctuations.
In other words, if Iran starts blocking the Strait of Hormuz, it would seriously escalate the conflict, leading to two major problems.
One is that a large number of global hedge funds would likely rush to the U.S. bond futures market. This could trigger a chain reaction, leading to more hedge funds accelerating their selling. The selling of treasury bonds could reach hundreds of billions in just a few hours, potentially triggering restrictions or suspension, also known as a “credit market freeze”.
A “freeze” in the credit market would mean a simultaneous loss of liquidity in all financial markets, including the money market and the stock market. The impact would be incalculable. The Fed may then massively expand its balance sheet, i.e., QE, and sharply cut interest rates at the same time, to save the markets.
The other problem is that if Iran does block the Strait of Hormuz, it would have a serious impact on inflation in all countries. The logic chain is very simple: the increase in the cost of crude oil transportation leads to an increase in the price of crude oil, which in turn leads to an increase in energy inflation, and finally affects overall inflation. After that, a series of chain reactions will be triggered, such as a rise in gold, the long bond in the U.S. debt appearing to plummet, and even a second banking crisis. If inflation rebounds badly or even reverses, the Fed may be forced to raise interest rates again to control inflation. The original policy path is disrupted, market expectations are subverted, and there will be a huge oscillation in the entire financial market.
Therefore, as long as Israel does not bomb Iran’s nuclear facilities, the impact on the global financial markets is still under control. However, if Israel does bomb Iran’s nuclear facilities, chaos will ensue. Therefore, we should pay special attention to the conflict between Israel and Iran and closely watch how Israel will retaliate.

U.S. May Release More Oil to Keep Gas Prices Low: 

President Joe Biden will do whatever he can to make sure gas prices stay affordable, according to John Podesta, a senior White House adviser. Last year, the Biden administration sold a record 180 million barrels of oil from the Strategic Petroleum Reserve (SPR) over about six months. This was done to lower gas prices after the conflict between Russia and Ukraine. Republicans criticized this sale because it partly reduced the amount of oil in the SPR to its lowest level in about 40 years. Podesta said that the president has done this before and will do everything he can to keep gas prices affordable.

Bailey Hints the BOE May Cut Rates Before the Fed, Hunt had also quoted his views: 

Andrew Bailey, the Governor of the Bank of England (BOE), said in a speech that inflation caused by demand is stronger in the U.S. than in the U.K. This comes after U.S. price data last week surprised markets by being stronger than expected. There’s strong evidence that price pressures in the U.K. are decreasing. The way inflation is changing in Europe and the U.S. is quite different. There’s little chance of inflation in the U.K. increasing like it has in the U.S. This suggests that the BOE could reduce rates before the Fed does, as the way inflation is changing in the two economies is becoming more different.
UK Chancellor of the Exchequer Jeremy Hunt said the prospect of interest rate cuts later this year would lift the mood of voters, hinting that Prime Minister Rishi Sunak won’t call a general election until the fall.
“The feel-good factor as interest rates start to come down, as people start to feel higher real disposable incomes, will be stronger in people’s minds come the early autumn than it is now,” Hunt said on Tuesday in a Bloomberg TV interview. “People have been through a very bruising period.”
The chancellor’s assessment of the UK economy came after Bank of England Governor Andrew Bailey suggested in an interview with the International Monetary Fund that the UK might be able to lower interest rates before the US, saying there is more “demand-led inflation pressure” in America than Britain, where there is “strong evidence” of price pressures retreating.
UK inflation is due to average 2.5% this year according to the IMF — above the BOE’s 2% target but in line with other European countries and lower than in the US. Given that progress on tackling inflation, markets are now almost fully pricing in a reduction from the UK’s current 5.25% rate in September.
The latest IMF forecasts – unveiled on Tuesday – also predict the UK will have weaker economic growth this year than any other Group of Seven nation except Germany. The British economy is expected to grow 0.5% this year, compared to a previous estimate of 0.6%, the IMF said.
On defense issues, Hunt said a proposal to use seized Russian assets to help fund Ukraine’s war effort is “very intriguing” and that he would discuss the idea with US Treasury Secretary Janet Yellen in the coming days. He also said he expects the UK to have to spend more on its military and that he wants other European countries to do so too.“We can’t just depend on the United States to defend Europe,” he said. “We need to play our part.”

Powell Dampens Rate-Cut Expectations Again: 

Jerome Powell, the Chairman of the Federal Reserve, has continued to make cautious remarks in his speeches. He said the U.S. economy is strong in most ways, but inflation hasn’t returned to the level the central bank wants. Inflation has been decreasing, but not quickly enough. So, the current policy should stay the same. This repeats what Powell said earlier this month. He said on April 3 that he didn’t plan to cut interest rates until the Fed was more sure that inflation was steadily decreasing towards its 2% target. Recently, some officials at the Fed also said that “the level of policy may remain unchanged”.
Speaking at the panel discussion on Tuesday, Fed Chair Powell underlined the necessity of persisting in restrained monetary policy, which was justified by the limited progress in reaching the Fed’s 2% inflation target. This stance implies that higher rates could last much longer than most investors and analysts anticipated.
This position follows a spate of strong economic numbers, such as job growth and retail sales, which show that the economy is strong. In March, 303,000 jobs were added, which was much more than expected, and retail sales grew by 0.7% percent, rather than 0.4% percent as predicted.
The Fed has recurrently utilised these indicators as the foundation for a slow strategy in lowering rates in spite of the pressure from different market segments to reduce rates to assist growth.

Lagarde Says Rates Will Be Cut Soon Unless There Are Major Shocks: 

Christine Lagarde, the President of the European Central Bank (ECB), said at the IMF spring meeting that they’re watching the process of inflation decreasing, which is happening as they expected. They just need to be more sure about the process of disinflation (the rate at which inflation is decreasing). If this continues as expected and there are no major shocks, it will be time to reduce the restrictive monetary policy soon. They don’t commit in advance to any path for interest rates. They rely on the data. The so-called “major shocks” include the risk of rising prices for commodities, especially energy and food, which could have a quick and immediate impact.
François Villeroy de Galhau, the Governor of the Bank of France, had a discussion with John Williams, the President of the New York Fed. Here’s a simpler explanation of what he said:
ECB’s Decision-Making: The European Central Bank (ECB) will make decisions based on a 2% inflation target and the best understanding of the data and future outlook for the euro area.
Disinflation in the Euro Area: In the euro area, there’s no sign that reducing inflation (disinflation) will become more difficult. Disinflation in services might be slower, but it won’t stop. The overall inflation rate (headline inflation) is still in line with the target because inflation in goods has decreased. Also, there are no signs of a cycle where wages and prices keep pushing each other up (a wage-price spiral), and the average pay per worker is slowing down significantly.
Accepting Longer Disinflation: We should accept that it might take longer to reduce inflation. This could help protect against the risk of inflation falling below the target, instead of keeping policy too tight to speed up disinflation.
First Rate Cut in June: Unless there are major shocks or surprises, we should decide to cut rates for the first time at our next meeting in June. I prefer a slow approach to cutting rates. There will need to be more cuts this year and next. The economy in the euro area isn’t as strong as in the U.S., so it’s more obvious that our monetary policy is slowly becoming less tight.
Real and Nominal Neutral Rates: In the euro area, the real neutral rate (the interest rate that neither speeds up nor slows down the economy) is now between 0% and 0.5%. So, the nominal neutral rate (the real neutral rate plus inflation), adjusted for 2% inflation, could be between 2% and 2.5%. This range is a reasonable guess for the average of ECB policy rates over a future full monetary cycle. It shows that we have a lot of room to lower our rates before we stop being restrictive.
Watching Geopolitical Developments: The ECB will also be keeping an eye on what’s happening in the Middle East and how it might affect energy prices. If a geopolitical conflict affects the process of reducing inflation after the first rate cut, the ECB will adjust the speed and goal of monetary policy going forward if necessary. We’ll still be in restrictive territory for a while anyway.

Jefferson Says the Policy Will Remain Restrictive for Longer if Necessary: 

Philip Jefferson, the Vice Chairman of the Federal Reserve, said that if inflation doesn’t slow down as expected, it would be right to keep the current restrictive policy for longer. He expects inflation to continue to decrease, with the policy rate staying at its current level, and that the labor market will stay strong, with labor demand and supply continuing to balance each other. If the data shows that inflation is more persistent than he currently expects, it would be right to keep the current restrictive policy for a longer time. With inflation data over the past three months higher than the lows seen in the second half of last year, while job growth and retail spending remain stronger than expected, the job of sustainably restoring 2% inflation is not yet done.

IMF Raises Its Outlook for Global Growth This Year to 3.2%: 

At 9 a.m. EDT on April 16, the International Monetary Fund (IMF) released its latest World Economic Outlook report. In the report, the IMF expects the global economy to grow at 3.2% in 2024, 0.1 percentage points higher than January’s forecast; global headline inflation is expected to fall to 5.9% in 2024 from 6.8% in 2023. The IMF forecasts that the global economy will increase by 3.2% as well in 2025. The report noted that geopolitical tensions and persistent core inflationary pressures remain the main risks facing the global economy.

Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“

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