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This Is The Same Pattern The Fed Followed Before The Great Depression
This Is The Same Pattern The Fed Followed Before The Great Depression
There is immense confusion surrounding July’s Federal Reserve meeting and the rather insane aftermath that has been spurred on in the trade war. The Fed’s latest rate decision of a mere .25 bps cut was seen as “disappointing”, this was then followed by Jerome Powell’s public statements making it clear that this was only a mid-year “adjustment”, and that it was not the beginning of a rate cutting cycle and certainly not the beginning of renewed QE. This shocked the investment world, which was expecting far more accommodation from the Fed after 7 months of built up expectations that the central bank was about to unleash the stimulus punch bowl again.
The question that very few people are asking, though, is why didn’t they? What is stopping them? Everyone from daytraders to the president wants them to do it, yet they continue to keep liquidity conditions tight. In fact, they even dumped another $36 billion in assets from their balance sheet in July. Why?
Keep in mind that the latest Fed decision does two things: First, it is an indirect admission that the U.S. is entering recession territory. Second, it is also an admission that the Fed doesn’t plan to do anything about it, at least, not until it’s too late. In other words, all those people who thought the central bank was about to kick the can on the current crash in economic fundamentals were wrong. As I have been predicting for many months, the Fed has no intention of trying to delay the effects of negative conditions any longer. The crash is now a reality that the mainstream will have to accept.
…click on the above link to read the rest of the article…
RBI Bows To Political Pressure With Unexpected Rate Cut
RBI Bows To Political Pressure With Unexpected Rate Cut
Fed Chairman Jerome Powell isn’t the only leader of a major central bank to capitulate to political (and market) pressure so far this year. On Thursday, RBI Gov. Shaktikanta Das during his first meeting at the helm of the bank led a 4-2 vote to cut rates after raising them twice last year.
Shaktikanta Das
Das was widely seen bowing to pressures from Prime Minister Nahrendra Modi, who is desperately trying to boost economic growth ahead of a re-election fight later this year. As one analyst at Mizuho Bank pointed out, the move risks reviving inflationary pressures in India after they had largely eased last year. Das was hastily appointed to lead the central bank in December after his predecessor quit following a very public battle over the RBI’s autonomy.
“If caught wrong-footed by higher oil, twin deficit worries and global risk aversion, the rupee may have to pay the price for monetary complacency, whether perceived or real,” says Vishnu Varathan, head of economics and strategy at Mizuho Bank Perceptions matter for India’s monetary policy, which is trying to target inflation expectations USD/INR may rise above 72.5 over the next 3-4 months; Mizuho’s view was for a prolonged hold in policy
The RBI cut its repurchase rate 25 basis points to 6.25%, a move that only 11 of 43 economists polled by Bloomberg had anticipated. The rest had expected no change.
The board also voted unanimously to switch the central bank’s policy stance to neutral from “calibrated tightening.”
Unsurprisingly, the Indian government cheered the cut, with Finance Minister Piyush Goyal tweeting that it would “give a boost to the economy, lead to affordable credit for small businesses, home buyers etc. and further boost employment opportunities,” said Indian Finance Minister Piyush Goyal in a post on Twitter.
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The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%
The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%
Late last month, India surprised 51 out of 52 economists when the RBI cut rates by 50bps.
Although economists have a reputation for being terrible when it comes to making predictions (getting it wrong perpetually is almost a job requirement), it’s difficult to understand how 51 of them failed to see a cut of that magnitude in the cards.
After all, it was just a little over a month earlier when the Indian government’s chief economic advisor Arvind Subramanian told ET Now television that India may need to “respond” to China’s monetary policy stance. He also hinted at further export weakness to come.
Here’s what the REER picture and the export picture looked like going into the RBI meeting:
And here’s what Deutsche Bank had to say in August:
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. Global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
Hence the outsized rate cut.
So that’s what the picture looked like going into Thursday’s export data and unsurprisingly, the numbers definitively show that global trade is in freefall. Here’s Reuters:
India’s exports of goods shrank by nearly a quarter in September from a year ago, falling for a 10th straight month and threatening Prime Minister Narendra Modi’s goal of boosting economic growth through manufacturing.
India’s economy, Asia’s third largest, is mostly driven by domestic demand, but the country has still felt the effects of China’s slowdown. Exports have dropped and consumer and industrial demand for imports has weakened.
Imports fell 25.42 percent in September from a year earlier to $32.32 billion.Exports stood at $21.84 billion, according to data released by the Ministry of Commerce and Industry on Thursday.
…click on the above link to read the rest of the article…
India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues
India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues
Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.
The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to “respond” to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.
Reinforcing that contention was the following from Deutsche Bank:
India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports.
Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view.
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
…click on the above link to read the rest of the article…
Stephen Poloz’s Zen Moment
Stephen Poloz’s Zen Moment
To cut or not to cut, that is the question. And fortunately for Bank of Canada Governor Stephen Poloz, it was a pretty easy question. A lagging US recovery, China’s downturn, lower oil prices and “bad weather” all contributed to this interest rate cut. “I wouldn’t describe it as a close decision,” he told the press, “It’s a decision where we had a number of trade-offs on the table. It requires a lot of deliberation and a lot of inputs, not a mechanical decision. Not even close.” But whereas Poloz admitted to feeling comfortable at the end of 2014, now there was a bunch of crap heading for the ceiling fan and that interest rate cut was Canada’s only way of taking cover.
Poloz is known for his metaphors but the above is mine. Poloz used the parable of the big oak tree to compare “analysing vulnerability” in the economy. The big oak tree is only a risk if there’s a branch that could break off and fall into your neighbours house. In Poloz’s mind, cutting interest rates must have been like sawing off that branch. He may have successfully migrated some future risk, but in doing so he didn’t bother with any long-term consequences. He may have sawed off that branch so it wouldn’t fall into the neighbours house, but by cutting without thinking ahead, the branch fell right into the neighbours house.
I hope that’s clear, because a lot of what the Bank of Canada says isn’t. Poloz is a fan ofGreenspeak but sometimes we get moments of incoherent clarity such as: “When other things are equal, a lower currency will be a stimulus to the economy.” When asked if China’s slow-down could affect Vancouver’s housing market and potentially the broader economy, Poloz crept back to his Greenspeak with a definite “I don’t know” and “I won’t speculate” sprinkled on top.
…click on the above link to read the rest of the article…
Bank of Canada Sees Global Economy, Freaks Out, Cuts Rate, Warns of Financial Stability Risks, Loonie Plunges
Bank of Canada Sees Global Economy, Freaks Out, Cuts Rate, Warns of Financial Stability Risks, Loonie Plunges
The Bank of Canada took a good look at the Canadian economy, saw it was sinking into the mire, glanced at the collapsed prices of commodities, particularly oil, saw how they were wreaking havoc in Canada, and then looked at the global economy, particularly at China and the US, and it freaked out.
It cut its overnight rate 25 basis points to 0.5%, the second rate cut this year, and attached a gloomy view about the Canadian economy with as it said a “significant downgrade” from its last estimate issued only in April. Things are heading south fast.
In his opening statement, Governor Stephen Poloz blamed oil, China, and dropping exports, particularly to the US which is “still a puzzle that merits further study,” he said, as the swooning Canadian dollar should have pushed up exports. The three culprits:
First, Canadian oil producers have lowered their long-term outlook for global oil prices, and have cut their plans for investment spending significantly more than previously announced.
Second, China’s economy is undergoing a structural transition to slower, domestic-driven growth, which is reducing Canadian exports of a range of other commodities.
Third, Canada’s non-resource exports have also faltered in recent months. While this is partly due to the first-quarter setback in the U.S. economy, it’s still a puzzle that merits further study.
This splits the economy in two, with the “resource economy” falling off a cliff, and with the “non-resource economy” motoring forward. Alas, they’re “not independent – the cancellation of an investment in the oil patch will often lead to a hit in the manufacturing sector, for example.”
Ah yes, and the ballyhooed positive effects of lower oil prices? They “have been slow to emerge.”
…click on the above link to read the rest of the article…
USDCAD Surges To 6 Year Highs As Bank Of Canada Slashes GDP Forecasts, Unexpectedly Cuts Rates
USDCAD Surges To 6 Year Highs As Bank Of Canada Slashes GDP Forecasts, Unexpectedly Cuts Rates
In what seems to have surprised FX trader, Bank of Canada has taken an ax to growth forecasts and rates…
*BOC CUTS CANADA 2015 GDP FORECAST TO 1.1% FROM 1.9%
*BANK OF CANADA CUTS 2Q GDP ESTIMATE TO -0.5% FROM 1.8%
*BOC SEES INCREASED DOWNSIDE RISKS TO CANADIAN INFLATION
*BANK OF CANADA CUTS BENCHMARK INTEREST RATE TO 0.5%
*CANADA OIL AND GAS INVESTMENT TO SHRINK 40% IN 2015, BOC SAYS
*BOC PROJECTIONS ASSUME CANADA DOLLAR AT 80 U.S. CENTS
Furthermore, it warns that “consumer debt vulnerabilities are edging higher” and export weakness is “puzzling.”
USDCAD exploded to 6 year highs..
Full Statement (link):
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Total CPI inflation in Canada has been around 1 per cent in recent months, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. Setting aside these transitory effects, the Bank judges that the underlying trend in inflation is about 1.5 to 1.7 per cent.
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Bank of Canada interest rate decision: To cut or not to cut?
With interest rates at historic lows, could it possibly make sense to go even further?
It came as a shock to just about everyone when Bank of Canada governor Stephen Poloz announced the central bank would lower its benchmark lending rate in January to 0.75 per cent.
That’s because after more than four years with a historically low one per cent, Canadians had been hammered with repeated warnings to pay down debt because lending rates were bound to go up — at some point.
- ANALYSIS | Should Stephen Poloz be more worried?
- DON PITTIS | Wobbly markets are more worrisome than oil
Then a cratering oil price changed the narrative. When the bank cut rates in January, it was six months into an oil drop that saw crude go from $95 a barrel this time last year to under $50. That was devastating for the oil patch — but also for the rest of Canada’s economy.
“This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada,” the bank said in explaining its bombshell rate cut.
Eagle eye on inflation
Although the bank keeps an eye on all sorts of economic data, the most important one from a monetary policy perspective is inflation — the upward creep of prices over time. The bank has a mandate of inflation targeting because according to many economists, if you can keep inflation in a narrow band between one and three per cent, everything else in the economy — from jobs, to GDP and the like — tends to take care of itself.
Lower lending rates make borrowing easier, which stimulates spending and investing, which nudges up inflation. Raising rates does the opposite. At least, so goes the theory.
When the bank cut rates in January, it raised the possibility of another one down the line. With Canada’s inflation rate currently at 0.9 per cent, there would seem to be ample wiggle room to cut again.
…click on the above link to read the rest of the article…
Bank of America forecasts another rate cut in Canada
Gloomy outlook for Canadian economy sees loonie pushed to 73 cents
Bank of America, one of the U.S.’s biggest banks, says the Bank of Canada may have to cut its key lending rate again later this year.
Bank of America says Canada’s economy will underperform the U.S. this year, hampered by low oil prices and worries over manufacturing competitiveness.
- Oil shock will hurt but will be short lived, Poloz says
- Time to stop waiting for America’s economic recovery: DonPittis
Already Canada is seeing investors move away from its bond and equity markets as they seek out a surer return in the U.S., the bank says.
Author Emanuella Enenajor says Canadian central bank governor Stephen Poloz is “handcuffed by the Fed,” which is expected to raise rates later this year.
U.S., Canadian economies on different paths
Bank of America says Bank of Canada governor Stephen Poloz will be ‘handcuffed by the Fed’ into raising rates. (Canadian Press)
“Even as the Fed begins a gradual rate hike cycle this year, we think the Bank of Canada will remain accommodative, and will likely ease by another 25 basis points to 0.5 per cent if growth disappoints, as we expect,” she wrote in a report released today.
She points to a decoupling of the Canadian and U.S. economies, so that growth in the U.S., which is expected to be robust, will not have the stimulating effect on the Canadian economy it did in the early 2000s.
A 1 per cent increase in US domestic demand lifts Canadian GDP by about 0.25 per cent under current conditions. Ten years ago, the impact of that same one per cent rise would have been twice as much of an impact on Canada’s economy, the report said.
Poloz has acknowledged weakness in Canada’s economy in the first quarter, but expects a rebound later in the year as exports grow because of U.S. demand.
…click on the above link to read the rest of the article…
China Cuts Rates (Again) In Desperate Bid To Buoy Stocks, Rescue Economy
China Cuts Rates (Again) In Desperate Bid To Buoy Stocks, Rescue Economy
For the third time since November, China has cut its benchmark lending rate.
Hours ago, the PBoC slashed the 1-year lending rate by 25bps to 5.1% and the 1-year deposit rate to 2.25%. The move comes just three weeks after Beijing cut the reserve requirement ratio for the second time this year and marks a continuation of a heretofore unseen trend in China: easing into a stock market rally.
From the PBoC announcement:
The further decline in deposit and lending rates, the focus is to continue to play a leading role in a good benchmark interest rate, the cost of financing to further promote the social downside, support sustained and healthy development of the real economy. According to the unified deployment of the State Council, November 2014 and March 2015, the People’s Bank has twice lowered the financial institutions lending and deposit benchmark interest rate. With the gradual implementation of the policy measures, financial institutions, lending rates continued to decline, the market interest rates dropped significantly, the overall social financing costs decreased. At present, the domestic economy accelerated restructuring, fluctuations in external demand, China’s economy is still facing greater downward pressure. Meanwhile, the overall level of domestic prices remain low, real interest rates are still higher than the historical average for the continued appropriate use of interest rate instruments to provide space. In view of this, the People’s Bank of China decided as from May 11, 2015, loans and deposits of financial institutions lowered the benchmark interest rate by 0.25 percentage point, to create a neutral appropriate monetary and financial environment for economic structural adjustment and restructuring and upgrading.
…click on the above link to read the rest of the article…
India Central Bank Cuts Interest Rate “Pre-Emptively” For Second Time In 2 Months
India Central Bank Cuts Interest Rate “Pre-Emptively” For Second Time In 2 Months
In a surprise move, the RBI just cut its main interest rates for the second time in two months, taking it from 6.75% to 6.50%, in what the central bank calls a “pre-emptive” policy move, but what is in reality merely a confirmation that so far in 2015 at least 20 central banks have lowered their interest rate.
From the statement:
The RBI notes that the rupee has remained strong relative to peer countries. While an excessively strong rupee is undesirable, it too creates disinflationary impulses…
…softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative. Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.
Via Bloomberg:
- INDIA’S RBI CUTS RATE TO 7.5%
- INDIA CUTS REVERSE REPURCHASE RATE TO 6.50% FROM 6.75%
- RBI KEEPS CASH RESERVE RATIO OF SCHEDULED BANKS UNCHANGED AT 4%
- INDIAN RUPEE ONE-MONTH FORWARDS EXTEND GAIN AS RBI CUTS RATE
- RAJAN SAYS FURTHER MONETARY ACTION TO DEPEND ON INCOME DATA
- RBI: DISINFLATION EVOLVING AT FASTER RATE THAN ENVISAGED
…and more from Reuters:
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China Cuts Interest Rates, Takes Number Of Central Banks Easing In 2015 To 21
China Cuts Interest Rates, Takes Number Of Central Banks Easing In 2015 To 21
And then there were 21.
Hours ago on Saturday, the country whose currency is largely pegged to the dollar which itself is now anticipating a rate hike in the coming months, surprised the world by confirming its economic slowdown yet again following a recent rate cut just this past November when it lowered its benchmark rate by 40 bps, after it again cut benchmark lending and deposit rates by 25 bps starting on March 1. Specifically, the PBOC will lower the one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.
From the PBOC announcement:
People’s Bank of China decided to cut financial institutions RMB benchmark lending and deposit interest rates since March 1, 2015. The one-year benchmark lending rate by 0.25 percentage point to 5.35%; year benchmark deposit rate by 0.25 percentage points to 2.5%, while the combination of market-oriented reforms to promote the interest rate, the upper limit of the floating range of interest rates on deposits of financial institutions by the deposit base 1.2 times to 1.3 times the interest rate adjustment; adjusted lending rates and individual housing provident fund deposit and other deposit and lending rates.
As the WSJ notes, “the latest move took place just as China’s legislature, the National People’s Congress, prepared to gather Thursday for its annual meeting. The gathering is usually when China unveils its economic growth target for the year. Last year’s growth of 7.4% came in just below the 2014 target of about 7.5%. It was the lowest growth rate in nearly a quarter century.”
…click on the above link to read the rest of the article…
Australian dollar skids to six-year low after RBA shock
Australian dollar skids to six-year low after RBA shock
(Reuters) – The Australian and New Zealand dollars weakened further in early trade in Europe on Tuesday after a sell-off following the Reserve Bank of Australia’s surprise decision to cut interest rates.
The outlook for both Antipodean currencies has worsened in recent weeks with concerns about growth generating expectations of generally looser monetary policy, but the RBA’s decision still came as a shock to many.
Another burst lower as Europe came on line brought the Aussie’s losses on the day to more than 2 percent. It hit an almost 6-year low of $0.7635 while the kiwi fell 1.5 percent to $0.7185, its lowest since early 2011.
“Its a big move and I think any bounce should be sold into,” said Graham Davidson, a spot trader with National Australia Bank in London.
“Generally when the RBA move, they tend to cut a handful of times. The feeling is of aneconomy where there is no source of growth, almost of despair.”
…click on the above link to read the rest of the article…
Putin Fingerprints Seen All Over Surprise Interest-Rate Reversal
Putin Fingerprints Seen All Over Surprise Interest-Rate Reversal
(Bloomberg) — The message some Russia watchers are getting from Friday’s surprise interest-rate cut is this: Start listening more to what President Vladimir Putin’s aides say about monetary policy and less to central bankers.
Here’s the key evidence. In comments made just nine days ago, the country’s central bank chief indicated she saw no chance of a rate cut any time soon after inflation soared to a five-year high. A week earlier, though, one of Putin’s most vocal economic aides urged the exact opposite, saying a reduction was needed to bolster the ailing economy.
So when the Bank of Russia shocked traders and analysts alike by announcing it was lowering the benchmark rate from an 11-year high, the words spoken by that aide, Andrey Belousov, left many to speculate that the Kremlin is exerting more pressure on central bank policy makers. The rate cut — to 15 percent from 17 percent — triggered a wave of ruble selling that drove the currency down as much as 4 percent, adding to a year-long selloff that’s left it down 50 percent percent against the dollar.
The rate cut “was useless — it will only put more pressure on credibility,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S. “They change their mind so fast but the environment is not really changing. This move is pure giving in to pressure from society, pressure from the government.”
…click on the above link to read the rest of the article…
Canada GDP shrinks, stirring talk of another rate cut
Canada GDP shrinks, stirring talk of another rate cut
OTTAWA (Reuters) – Canada’s economy unexpectedly shrank by 0.2 percent in November, prompting market talk that the Bank of Canada will cut interest rates in March for the second time in six weeks.
Analysts had expected no growth from October. The month-on-month decline was the largest since a 0.4 percent drop in December 2013.
Gross domestic product shrank on weaker manufacturing, mining and oil and gas extraction, Statistics Canada said on Friday.
Last week the central bank shocked markets by lowering its key interest rate to counter plunging oil prices that have cut economic growth in this oil-exporting country and the value of the Canadian dollar.
“The data in hand do support the Bank of Canada’s very bearish interpretation of the impact of lower oil on the Canadian economy,” said Bill Adams, economist at PNC Financial Services Group.
“If economic data remain this weak in early 2015, it could justify another rate cut from the Bank of Canada at either the March or April rate decisions,” Adams said.
The central bank is due to make an interest rate announcement on March 4 and market operators have priced in a 76 percent chance of another cut then.
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