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Research Review | 14 January 2022 | Inflation

The Time-Varying Relation between Stock Returns and Monetary Variables David G. McMillan (University of Stirling) November 2, 2021 The nature of the relation…

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This article was originally published by The Capital Spectator

The Time-Varying Relation between Stock Returns and Monetary Variables
David G. McMillan (University of Stirling)
November 2, 2021
The nature of the relation between stock returns and the three monetary variables of interest rates (bond yields), inflation and money supply growth, while oft studied, is one that remains unclear. We argue that the nature of the relation changes over time and this variation is largely driven by shocks, with a change in risk associated with each variable shifting the pattern of behaviour. We show a change in the correlation between each of the three variables with stock returns. Notably, a predominantly negative correlation with bond yields and inflation becomes positive, while the opposite is true for money supply growth. The shift begins with the bursting of the dotcom bubble but is exacerbated by the financial crisis. Results of predictive regressions for stock returns also indicate a switch in behaviour. Predominantly negative predictive power switches temporarily to positive around economic shocks. This suggests that higher yields, inflation and money growth typically depress returns but support the market during periods of stress. However, after the financial crisis, higher inflation and money growth exhibit persistent positive predictive power and suggests a change in the risk perception of higher values.

Determinants of Inflation Expectations
Richhild Moessner (Bank for International Settlements)
December 2021
This paper analyses the determinants of short-term inflation expectations based on surveys of professionals, using dynamic cross-country panel estimation for a large number of 34 OECD economies. We find that food consumer price inflation and depreciations of the domestic exchange rate have significant positive effects on professionals’ survey-based inflation expectations. Moreover, core consumer price inflation and the output gap have significant positive effects.

The zero lower bound on inflation expectations
Yuriy Gorodnichenko (U. of California) and Dmitriy Sergeyev (Bocconi University)
January 11, 2022
Inflation expectations affect the decisions of households, firms, and policymakers. Expectations of negative inflation can be particularly harmful and lead to deflationary spirals when nominal interest rates are near zero. This column uses survey evidence to show that households and firms almost never expect deflation, even when it is a clear possibility. This apparent zero lower bound on inflation expectations has important implications for macroeconomic dynamics and the effectiveness of monetary policy. Unconventional policies, such as forward guidance, which aim to increase inflation expectations may be less effective when expectations are stuck at the zero lower bound.

The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23
Lutz Kilian and Xiaoqing Zhou (Dallas Fed)
November 1, 2021
Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, but only by 0.4 percentage points at the end of 2022. In contrast, the impact on measures of core inflation such as trimmed mean PCE inflation is only 0.4 and 0.3 percentage points in 2021 and 2022, respectively. These estimates already account for any increases in inflation expectations under the scenario. The peak response of the 1-year household inflation expectation would be 1.2 percentage points, while that of the 5-year expectation would be 0.2 percentage points.

Measuring U.S. Core Inflation: The Stress Test of COVID-19
Laurence Ball (Johns Hopkins University), et al.
December 1, 2021
Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices, has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded.

Feeling the Heat: Extreme Temperatures and Price Stability
Donata Faccia (European Central Bank), et al.
December 1, 2021
We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability.

The Rise of the Taylor Principle
Carlos Goncalves (IMF) and Bernardo Guimaraes (FGV)
December 9, 2021
We estimate the response of interest rates to inflation using data for 18 developed countries since 1915, within 30-year moving windows. Until 1972, interest rates are virtually insensitive to inflation. From then on, the interest-rate response to inflation starts to rise, and monetary policy responses get more heterogeneous across countries. In recent decades, all countries in the sample seem to abide by the Taylor Principle. We then take advantage of the observed policy heterogeneity in parts of our sample to estimate the effectiveness of the Taylor Principle. We run panel regressions of inflation volatility on the interest-rate response to inflation with country- and time- effects. We find that a stronger monetary policy response to inflation leads to lower inflation volatility.


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Precious Metals

Cleantech Boom 2.0: Does Mining Have a Place?

Investment in mining and its resources is an integral part of cleantech as green initiatives to make the energy transition possible.
The post Cleantech…

The climate crisis is back at the forefront of political discussions following COP26 and several initiatives aiming to reduce carbon emissions have been announced. Decarbonising our economy is a difficult but urgent task and continued technological innovation will help. Although new technologies will aid the reduction of carbon emissions, the sheer volume of raw materials required to innovate are significant. Is investment in decarbonisation a reasonable excuse to further dig up the planet?

Defining cleantech

‘Cleantech’ (often used interchangeably with ‘climatetech’) refers to innovative solutions to address the challenges of climate change. These solutions help to achieve the goals of environmental sustainability by storing or generating energy with limited carbon emissions, thus assisting decarbonisation efforts. Investors are recognising the importance and potential longevity of this industry and investment is pouring in.

Electric vehicles (EVs) are one of the leading technologies required to reduce the emissions of the transport industry, but the transition to renewables and EVs will require an abundance of materials and extraction rates are rising.

Investment floods in

While there was a boom in cleantech investment in 2005, it began to be seen as a risky choice and interest dwindled due to investment failures in areas such as biofuels and solar. The investment bubble then burst. However, the urgency to reach net-zero has reignited interest in cleantech and, as innovations in areas such as agriculture and batteries are announced, investors are scrambling for their share. This investment boom is spurring an increase in the number of start-ups, driving the much-needed innovation required to help solve the climate crisis.

Mining activity is on the rise

To deal with the growing number of clean technologies, mining extraction rates are also growing. Various metals and minerals are required in the transition to decarbonisation and minerals such as cobalt and lithium are the building blocks of cleantech. As the world attempts to reach net zero, demand for critical minerals will skyrocket.

According to a 2020 World Bank Report, a low-carbon future will be more mineral intensive as clean energy requires more materials than fossil-fuel-based technologies. The International Energy Agency estimates that EVs require six times the amount of minerals as a typical car and nine times more minerals are required for wind energy plants than gas-fired equivalents. However, ESG concerns around the traditional heavy industry are so far causing investors to look the other way.

ESG in mining

There are several ESG concerns tied to mining, notably, the environmental degradation caused by the erection and operation of mines to meet the growing demand for materials. Social and governance concerns are becoming increasingly apparent and stories of dangerous working conditions, artisanal miners and child labour are common. ESG funds often exclude mining as a result. To counteract this, the mining sector is beginning to show signs that it is taking ESG seriously. A leading example is Glencore, who GlobalData classifies as a climate leader. Glencore has pledged to reach net-zero carbon emissions by 2050. Its carbon reduction strategies include the electrification of mining fleets, which has been pioneered by companies such as Newmont and Boliden.

As investors are increasingly becoming more climate aware, mining companies are recognising the potential upsides of taking ESG seriously. This will drive companies to innovate to establish how they can decouple their growth from emissions.

Investors need to think about the future

A boom in green investment has begun again but shifting investment away from mining will undermine the green energy transition. Mining companies should further implement ESG principles and demonstrate that they are serious about ESG. Green funds should also include these mines in their portfolios instead of blacklisting them. Without the mining industry, the energy transition is not possible and investors should stop shying away from this heavy industry by focusing all their investment on renewable technologies. Currently, the production of these technologies cannot be achieved without mining and the resources it produces. Investors should instead use the power they possess to exert pressure on mining companies to consider ESG strategies. They would then need to prove that they are more sustainable and innovate their techniques to achieve this. Therefore, the boom in green investment can be used to tidy up the mining industry and keep the cleantech bubble afloat.

The post Cleantech boom 2.0: Does mining have a place? appeared first on Mining Technology.

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Today’s Mortgage Rates Cross Over 4% Mark | January 19, 2022

The average rate for a 30-year fixed-rate mortgage is up to 4.033% today. It’s the first time this daily rate has averaged more than 4% since September…

The average rate for a 30-year fixed-rate mortgage is up to 4.033% today. It’s the first time this daily rate has averaged more than 4% since September 2020. All other loan categories are also seeing higher rates, with the average for a 30-year refinance loan increasing to 4.148%. The rate for a 5/1 adjustable-rate mortgage is up to 2.475%.

While rates have been steadily climbing over the past few weeks, many borrowers with strong credit can still find attractive rates and monthly payments on a new mortgage or when refinancing.

  • The latest rate on a 30-year fixed-rate mortgage is 4.033%.
  • The latest rate on a 15-year fixed-rate mortgage is 3.067%. ⇑
  • The latest rate on a 5/1 ARM is 2.475%. ⇑
  • The latest rate on a 7/1 ARM is 3.824% ⇑
  • The latest rate on a 10/1 ARM is 4.067%. ⇑

Money’s daily mortgage rates reflect what a borrower with a 20% down payment and a 700 credit score — roughly the national average score — might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Freddie Mac’s weekly rates will generally be lower, since they measure rates offered to borrowers with higher credit scores.

Today’s 30-year fixed-rate mortgage rates

  • The 30-year rate is 4.033%.
  • That’s a one-day increase of 0.117 percentage points.
  • That’s a one-month increase of 0.464 percentage points.

The 30-year mortgage is the most common home loan in America thanks to its long payback time, relatively low and steady monthly payments and predictable interest rate. The downside is that the interest rate will be higher compared to a shorter-term loan, so you pay more interest over the years.

Today’s 15-year fixed-rate mortgage rates

  • The 15-year rate is 3.067%.
  • That’s a one-day increase of 0.124 percentage points.
  • That’s a one-month increase of 0.525 percentage points.

The 15-year fixed-rate mortgage has a lower interest rate compared to a longer-term loan, so you’ll save over time with this type of loan. However, the shorter term also means the monthly payments will be higher than a similar 30-year loan.

The latest rates on adjustable-rate mortgages

  • The latest rate on a 5/1 ARM is 2.475%. ⇑
  • The latest rate on a 7/1 ARM is 3.824%. ⇑
  • The latest rate on a 10/1 ARM is 4.067%. ⇑

The interest rate on an adjustable-rate mortgage will be fixed for the first few years before it becomes variable. The rate on a 5/1 ARM, for example, is fixed for five years, then resets yearly. An ARM could be a good option if you don’t plan on staying in the home long term, as the initial interest rate is usually very low. The downside is that there could be a big increase once the rate starts to reset .

The latest VA, FHA and jumbo loan rates

The average rates for FHA, VA and jumbo loans are:

  • The rate on a 30-year FHA mortgage is 3.9%. ⇑
  • The rate on a 30-year VA mortgage is 4.012%. ⇑
  • The rate on a 30-year jumbo mortgage is 3.726%. ⇑

The latest mortgage refinance rates

The average refinance rates for 30-year loans, 15-year loans and ARMs are:

  • The refinance rate on a 30-year fixed-rate refinance is 4.148%. ⇑
  • The refinance rate on a 15-year fixed-rate refinance is 3.185%. ⇑
  • The refinance rate on a 5/1 ARM is 2.77%. ⇑
  • The refinance rate on a 7/1 ARM is 3.967%. ⇑
  • The refinance rate on a 10/1 ARM is 4.212%. ⇑

Where are mortgage rates heading this year?

Mortgage rates sank through 2020. Millions of homeowners responded to low mortgage rates by refinancing existing loans and taking out new ones. Many people bought homes they may not have been able to afford if rates were higher. In January 2021, rates briefly dropped to the lowest levels on record, but trended slightly higher through the rest of the year.

Looking ahead, experts believe interest rates will rise more in 2022, but also modestly. Factors that could influence rates include continued economic improvement and more gains in the labor market. The Federal Reserve has also begun tapering its purchase of mortgage-backed securities and announced it anticipates raising the federal funds rate three times in 2022 to combat rising inflation.

While mortgage rates are likely to rise, experts say the increase won’t happen overnight and it won’t be a dramatic jump. Rates should stay near historically low levels through the first half of the year, rising slightly later in the year. Even with rising rates, it will still be a favorable time to finance a new home or refinance a mortgage.

Factors that influence mortgage rates include:

  • The Federal Reserve. The Fed took swift action when the pandemic hit the United States in March of 2020. The Fed announced plans to keep money moving through the economy by dropping the short-term Federal Fund interest rate to between 0% and 0.25%, which is as low as they go. The central bank also pledged to buy mortgage-backed securities and treasuries, propping up the housing finance market but began cutting back those purchases in November.
  • The 10-year Treasury note. Mortgage rates move in lockstep with the yields on the government’s 10-year Treasury note. Yields dropped below 1% for the first time in March 2020 and have been rising since then. On average, there is typically a 1.8 point “spread” between Treasury yields and benchmark mortgage rates.
  • The broader economy. Unemployment rates and changes in gross domestic product are important indicators of the overall health of the economy. When employment and GDP growth are low, it means the economy is weak, which can push interest rates down. Thanks to the pandemic, unemployment levels reached all-time highs early last year and have not yet recovered. GDP also took a hit, and while it has bounced back somewhat, there is still a lot of room for improvement.

Tips for getting the lowest mortgage rate possible

There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.

Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.

Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the home’s price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.

Shop around for the best rate. Don’t settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.

Also. take time to find out about different loan types. While the 30-year fixed-rate mortgage is the most common type of mortgage, consider a shorter-term loan like a 15-year loan or an adjustable-rate mortgage. These types of loans often come with a lower rate than a conventional 30-year mortgage. Compare the costs of all to see which one best fits your needs and financial situation. Government loans — such as those backed by the Federal Housing Authority, the Department of Veterans Affairs and the Department of Agriculture — can be more affordable options for those who qualify.

Finally, lock in your rate. Locking your rate once you’ve found the right rate, loan product and lender will help guarantee your mortgage rate won’t increase before you close on the loan.

Our mortgage rate methodology

Money’s daily mortgage rates show the average rate offered by over 8,000 lenders across the United States the most recent business day rates are available for. Today, we are showing rates for Tuesday, January 18, 2022. Our rates reflect what a typical borrower with a 700 credit score might expect to pay for a home loan right now. These rates were offered to people putting 20% down and include discount points.

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Canadian dollar falls below 1.25

The Canadian dollar continues to push higher and USD/CAD has dropped below the symbolic 1.25 line. The pair is currently trading at 1.2476 and is close…

The Canadian dollar continues to push higher and USD/CAD has dropped below the symbolic 1.25 line. The pair is currently trading at 1.2476 and is close to 1.2553, its lowest level since November 10th.

US Treasury rates continue to move higher. After punching past 1.80% on Tuesday, a 2-year high, the 10-year rate has climbed to 1.90%. The 10-year rate hasn’t been above the symbolic 2% level since July 2019, but it looks poised to climb above that line shortly. The jump in US yields is reflective of market concerns that the Fed will accelerate its tightening. Last week, FOMC member Patrick Harker said that the Fed could raise rates three or four times this year. That was not big news, but the markets paid attention when JP Mogan’s CEO Jamie Dimon weighed in and stated that the Fed might hike six or seven times. Higher yields should provide a boost for the US dollar.

Will Canada CPI be a market-mover?

Canada will release CPI data for December later in the day. The headline reading is expected in at 4.8%, while core CPI is forecast at 3.5%. These inflation readings will be carefully monitored by the BoC and could be a market-mover for the Canadian dollar. If the inflation reports prove to be a big miss, the Canadian dollar could lose ground, as expectations that the BoC will raise rates next week would ease. Conversely, strong reading will provide support for the bank to raise rates next week, which is bullish for the Canadian dollar.

Oil prices are a key driver for the Canadian dollar, and the recent jump in oil prices has helped boost the currency, with USD/CAD falling by 1.33% in January. With geopolitical tensions rising in the Persian Gulf and Ukraine, oil could head closer towards the USD 100 level, which would be great news for the Canadian dollar.

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USD/CAD Technical

    • USD/CAD is testing support at 1.2513. Below, there is support at 1.2396
    •  There is resistance at 1.2762 and 1.2879

 

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