March 20th Fundamental Facts
5. Canada’s inflation fell more than expected in February, which will boost expectations of rate cuts in the middle of the year.
6. All eyes on FOMC meeting tonight !
7. US Bond Traders Step Up Short Bets on Fear the Fed Will Dash Rate-Cut Hopes.
8. Gold and Global Markets Hit All-Time Highs at “The Same Time”!
9. Oil Retreats from Multi-Month Highs, Strong Dollar Dents Demand.
[News Details]
US Feb housing starts rose to the highest level since May last year.
In February, there was a significant rise in U.S. housing starts, marking the highest level since the previous May. This surge is indicative of a rebound in the housing market. The Federal Reserve is expected to maintain current interest rates, with no clear indication of an initial reduction. The focus is shifting towards long-term interest rate projections, which are likely to increase due to the economy’s resilience.
FED Chair Powell will avoid sending a clear signal on the “first cut”, and long-term interest rate forecasts may rise.
The Federal Reserve’s concern is more about the potential for a hard economic landing than the number of interest rate reductions. This concern is driven by the question of whether delaying a rate cut could lead to a recession. This risk is likely to influence the Fed’s decisions throughout the year.
It is almost a fact that the Fed will keep interest rates unchanged at this meeting. Powell may not give any clear signal about the first-rate cut. The Fed will likely pivot more hawkishly (POSITIVITY) to ease only 50 bps this year. Median estimates for economic growth, inflation, and unemployment this year may shift slightly, but they won’t have much impact on the economy. The biggest change is the “long-term” outlook for interest rates, the neutral rate assessment. Long-term interest rate forecasts are likely to rise as the economy shows resilience to interest rates above 5%, with 2.75% or even 3% now looking more reasonable. In addition, the FOMC will also have in-depth discussions on balance sheet reduction, which could lead to the publication of some principles on how the Fed plans to taper and eventually end balance sheet reduction.
The Fed is more concerned about whether the economy will have a hard landing than the number of interest rate cuts Wall Street Journal correspondent Nick Timiraos believes that whether the recent strong inflation data will cause the Fed to delay a little bit of interest rate cuts is still the most concerned issue. However, the Fed’s focus may be different: Will it trigger a recession if it waits too long for a rate cut? While Fed officials won’t put this issue at the top of their minds at this week’s meeting, this risk is likely to drive thinking for the rest of the year, allowing the Fed to eventually cut rates at some point.
The Federal Reserve (Fed) is expected to maintain the current interest rates at 5.25-5.50%. The focus, however, is on the Fed’s updated economic projections and dot plot, which will provide insights into the anticipated path of monetary easing this year. The key question is whether the Fed will continue to project three rate cuts within the year, potentially starting in June, or adjust its outlook to envision just two cuts for the year, likely delaying the initial reduction to the third quarter due to persistent inflation. The December dot plot showed a split among Fed members, with a shift of just two dots potentially indicating only two rate cuts. Market expectations currently assign a slightly over 60% probability to a June rate cut and a 64% likelihood of the federal funds rate adjusting down to 4.50-4.75% by the end of December. The 10-year yield closed mildly lower at 4.297, but there is no clear sign of peaking yet. A hawkish FOMC result today, signaling fewer rate cuts this year, could push the 10-year yield through the 4.354 resistance, pulling the Dollar higher along. However, strong resistance is expected between 4.391 and 4.534 to limit the upside.
The UK Chancellor of the Exchequer hints that the government is considering holding a general election in October.
In the UK, there are indications that a general election may be held in October. The Chancellor of the Exchequer, Jeremy Hunt, suggested this timeline during a discussion about the next government spending review. The review needs to be completed before the next fiscal year begins in April. If the election is held in October, the timeline will be tight, so planning is already underway, focusing on the productivity factor. The UK is required to hold a general election before the end of January next year.
This expenditure assessment must be completed before the start of the next fiscal year in April next year. Of course, if the election is in October, the time will be extremely tight. So, UK is thinking ahead about the most important element of spending assessment, which is the productivity factor.
Canada’s inflation fell more than expected in February, which will boost expectations of rate cuts in the middle of the year.
On Tuesday, data revealed an unexpected drop in Canada’s annual inflation to 2.8% in February, marking the smallest rise since June of the previous year. Core inflation metrics also decreased to a low not seen in over two years, potentially leading to predictions of a rate cut in the middle of the year. The Consumer Price Index (CPI) saw a month-on-month increase of 0.3%, falling short of the anticipated 0.6%.
The decline in inflation in February was primarily attributed to the cost of mobile phone services, food purchased from stores, and internet access services, according to Statistics Canada. For the first time since October 2021, the rise in grocery prices, at 2.4%, was lower than the headline inflation.
The median CPI decreased from 3.3% to 3.1%, marking a five-month trend of slowing or stable rates, and reaching its lowest point since November 2021. The CPI adjustment index dropped from 3.3% to 3.2%, slowing for the second month in a row and currently at its lowest since July 2021. A year-on-year increase in gasoline prices in February was noted by Statistics Canada as a factor that partially counteracted the inflation slowdown. After a 4% drop in January, gasoline prices rose by 0.8% in February.
The Pound to Canadian Dollar exchange rate increased by a third of a per cent to 1.7278 following a report by Statistics Canada that showed a rise in CPI inflation by 0.3% in February, which was half the anticipated rate of 0.6%. This pushed the annual increase further into the Bank of Canada’s 1-3% inflation target range to 2.8%, a decrease from January’s 2.9%. The Bank of Canada’s aggregate core inflation measures, CPI trim (+3.2%) and CPI median (+3.1%), both moved closer to the upper end of the inflation target range in Canada. The market had expected an inflation increase, but the disinflation process continued without any areas of concern in the price basket. As a result, the Bank of Canada will find it increasingly difficult to justify maintaining current interest rates. The market has responded by increasing the likelihood of an earlier rate cut, which is negatively affecting the Canadian Dollar. Economists at Desjardins Bank predict a clear policy shift will occur sooner, with rate cuts beginning in June 2024. CIBC economists also believe the Bank of Canada will cut rates in June.
US Bond Traders Step Up Short Bets on Fear the Fed Will Dash Rate-Cut Hopes.
The US central bank is expected to maintain steady rates, but there’s growing apprehension that its new forecasts may indicate a reluctance to relax monetary policy. Policymakers had anticipated three quarter-point reductions in 2024, but the economy has shown unexpected resilience and inflation has remained above the Fed’s target.
Bond yields have increased this year, leading to losses for investors, as hopes for a significant policy easing by the Fed have diminished. Traders initially expected the central bank to start reducing rates by this meeting and make about six such moves by the end of the year. However, they have since revised their expectations to roughly three rate cuts in 2024.
There’s a chance that the latest release will indicate policymakers expect even fewer cuts, which could trigger another selling round. Senior economist Tom Simons expects the median policymakers’ forecast to set the benchmark rate at about 4.88% by the end of the year, implying just two quarter-point cuts.
Despite widespread speculation that rates will decrease later this year, there are still signs of bullishness in the Treasury market. For instance, JPMorgan Chase & Co.’s latest client survey showed that while short bets have increased, outright long positions have also risen.
On Monday, two-year Treasury yields reached the highest levels of the year, rising to as much as 4.75%, though they dropped slightly on Tuesday. The options market has shown investors preparing for such risks. Traders have also been seeking protection against a hawkish shift with options linked to the Secured Overnight Financing Rate, which closely follows the central bank’s policy path.
Open interest data over the past week has shown a significant amount of new short positions added in 10-year note futures. JPMorgan’s latest survey of Treasury clients shows neutral positions dropping as both long and short positions rose in the week up to March 18. Moreover, the outright long positions are now the biggest since Jan. 29.
CFTC data in the week up to March 12 showed roughly 183,000 10-year note futures-equivalents of asset manager net-long liquidation, continuing the recent de-leveraging trend out of Treasury futures and potentially into credit. Asset manager net long positioning in Treasury futures is now at its lowest since July.
The most populated SOFR options strike out to the Dec24 tenor is the 95.50 strike, despite a heavy amount of liquidation seen over the past week. Other populated strikes include the 95.00, 95.25 and 94.875 where a decent amount of Jun24 puts open interest also remains.
Gold and Global Markets Hit All-Time Highs at “The Same Time”!
Gold prices have been on a steady rise since last year, reaching over US$2,100 an ounce in early March 2024. Simultaneously, global markets are also experiencing record highs. The Nikkei in Japan surpassed the 40,000 mark in March, a level unseen since 1989, while the Dow Jones Industrial Average in the U.S. closed above 39,000 for the first time in February.
Analysts attribute these simultaneous surges to expectations of interest rate cuts from the U.S. Federal Reserve. Despite the Fed’s rate hikes in response to rising inflation since March 2022, the market anticipates rate cuts starting from June. This expectation has led to a unique situation where gold, a safe-haven asset, is trading higher alongside riskier assets like equities.
The optimism surrounding potential rate cuts, coupled with better-than-expected earnings in the fourth quarter and a rally in AI and tech stocks, has contributed to the strong market performance. However, investors remain cautious due to potential risks such as higher market volatility, geopolitical tensions, and fiscal debt.
Historically, gold and stocks have appreciated simultaneously during periods of economic and political uncertainties, such as after the U.S. sub-prime crisis in 2007-2008 and the onset of the COVID-19 pandemic in 2020-2021. The current simultaneous rise indicates that investors are hedging their bets.
Despite the strong market performance, analysts advise investors to maintain a disciplined approach to investing and diversify their portfolios. They also agree that gold prices have not peaked yet, with predictions of it reaching US$2,300 an ounce by the first quarter of 2025. For those looking for an alternative to gold, silver is suggested as a good option due to its current undervaluation and critical role in solar panel production.
Oil Retreats from Multi-Month Highs, Strong Dollar Dents Demand.
On Wednesday, oil prices saw a slight decrease due to a stronger dollar reducing investor interest and traders cashing in after recent highs. Brent crude futures for May delivery dropped by 16 cents to $87.22 a barrel, while U.S. West Texas Intermediate futures for April delivery fell by 31 cents to $83.16 a barrel. The more active May WTI contract was down 18 cents at $82.55 a barrel. The rise of the U.S. dollar index, indicating a robust U.S. economy, has made oil more costly for investors with other currencies, thus reducing demand. Traders are awaiting the Federal Reserve’s interest rate announcement for indications of its rate path for the rest of the year. Both Brent and WTI reached their highest levels since late October in the previous session due to concerns over crude and petroleum supplies following Ukrainian drone attacks on Russian refineries. The strikes have decreased Russian refining capacity, leading to increased crude oil exports from the country. If these disruptions continue, it could force Russian producers to cut supply if they can’t export all of this crude oil. The American Petroleum Institute reported a decrease in U.S. crude oil and gasoline stockpiles last week, while distillate inventories increased. Official stockpile data from the U.S. Energy Information Administration is expected later on Wednesday.
Source :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN etc
Prepared to you by “Akif Matin”
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