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The Fed Speaks

S&P 500 futures are currently down 25 points in the overnight session and crude oil is over 3% lower at $63. 10-year UST yields are about 4bps lower…

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This article was originally published by Real Investment Advice

S&P 500 futures are currently down 25 points in the overnight session and crude oil is over 3% lower at $63. 10-year UST yields are about 4bps lower at 1.23%. Other than the Fed minutes from yesterday there is little new news to blame for the sharp moves last night.


The Fed shed little new light in the July FOMC minutes in regards to the schedule and pace of Fed taper. While some Fed members seem eager to start tapering as soon as September, others voiced concern about downward inflation pressure and how the market may perceive tapering. We look to the Jackson Hole Fed conference late next week for more guidance.

Highlights from the Fed minutes from the July 28th FOMC meeting:

  • “Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.”
  • “They are worried that accelerating plans to wind down the asset purchases could lead investors to question whether the Fed is in a hurry to raise rates or less committed to achieving lower unemployment.”
  • SOME PARTICIPANTS REMAINED CONCERNED ABOUT THE MEDIUM-TERM INFLATION FORECAST AND THE PROSPECT OF MAJOR DOWNWARD PRESSURE ON INFLATION RESURFACING.
  • “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year”
  • “Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time.”
  • “The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures were elevated. In particular, the forward price-to-earnings ratio for the S&P 500 index stood at the upper end of its historical distribution; high-yield corporate bond spreads tightened further and were near the low end of their historical range; and house prices continued to increase rapidly, leaving valuation measures stretched.”

The Fed’s Reverse Repurchase Repo program set another new high at $1.116 trillion. The increasing trend points to the large and growing amount of cash being held at banks and money market funds. These massive balances are a green light of sorts for the Fed to taper. The large amount of cash on the sidelines will help offset the Fed buying less.


Housing Starts were weaker than expectations at 1.534 million annualized versus 1.643 million last month. Higher input prices and a growing reluctance to buy homes are likely causing home builders to scale back. Building permits were up slightly to 1.635 million. Given the increasing supply of existing homes, higher home prices, and weakening consumer sentiment we might find that some builders will reconsider and delay using the permits to build.


Hot Stocks We’re Watching


Since February, the Russell 2000 (IWM), tracking small-cap stocks, is little changed. Over the same period, the S&P 500 has risen by over 20%. The smaller graph below shows the underperformance of small caps to the S&P via the IWM: S&P price ratio. Many small-cap companies are feeling the negative effects of higher prices and are not able to offset inflation with lower interest rates to the degree large-cap companies can. Stripping the S&P 500 of the FANMG stocks and a few other leaders would leave the S&P 500 looking a lot like the Russell Index. This serves as a reminder of Bob Farrell’s investment rule #7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.


The graph below, courtesy of Goldman Sachs, shows the strong negative correlation between the price of gold to 10-year UST real rates. Recently, the correlation has failed. If the correlation regains its prior strength, the graph implies gold is underpriced by nearly $300, real rates are about to rise, or some combination of both. Real rates increase if Treasury yields rise and/or inflation expectations decline. We suspect it will be the latter.

The post The Fed Speaks appeared first on RIA.

Precious Metals

Is Silver a good buy in October 2021?

Silver extended its correction from the recent highs above $24, and we could see even lower prices in the weeks ahead if the U.S. dollar remains strong….

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Silver extended its correction from the recent highs above $24, and we could see even lower prices in the weeks ahead if the U.S. dollar remains strong. The demand for the dollar continues to grow, although it remained below its weekly high of 0.86 compared to the euro.

Fundamental analysis: Fed Chair Jerome Powell said that interest rates could rise quicker than expected

Since the beginning of September, the silver price has weakened more than 5% and reached the price levels that we had seen in November 2020. The U.S. central bank reported on Wednesday it could begin reducing its monthly bond purchases by as soon as November 2021, which positively influenced the U.S. dollar, and the most significant force behind the silver price slide is the appreciation of the U.S. dollar.

“The U.S. central bank is preparing the ground to possibly begin dialing back some of the extraordinary support it has given the economy during the pandemic. The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff,” Fed Chair Jerome Powell told reporters on Wednesday.

The U.S. Federal Reserve switched to a more hawkish tone, and Fed Chair Jerome Powell said that interest rates could rise quicker than expected by next year. Jerome Powell also said that Fed achieved its goal on inflation, while more than half of Fed members believe that the economy reached the employment goal.

The global business activity is recovering, the U.S. unemployment rate fell to 5.2% in August, and the rapid price increases are also a reason to begin raising rates. The prospect of interest rate hikes positively influences the U.S. dollar, and those whose interest is to invest in precious metals like Silver should have the U.S. dollar on their “watch list.”

Technical analysis: $20 represents a strong support level

Those whose interest is to invest in commodities like Silver should consider that the risk of further decline is still not over.

Data source: tradingview.com

The important support level currently stands at $20, and if the price falls below this level, it would be a firm “sell” signal. The next price target could be around $18 or even below.

On the other side, if the price jumps above $25, it would be a signal to trade Silver, and we have the open way to $27.

Summary

Silver price remains under pressure after the U.S. central bank reported that it could begin reducing its monthly bond purchases by as soon as November. The most important driving force behind the price slide is the appreciation of the U.S. dollar, and investors will continue to pay attention to the U.S. Federal Reserve comments.

The post Is Silver a good buy in October 2021? appeared first on Invezz.

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Economics

Market-Based Indicators of Inflation, Growth and Risk

Medium term inflation expectations are muted, growth expectations are recovering slightly, and perceived risk seems contained. Figure 1: Top panel: Five…

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Medium term inflation expectations are muted, growth expectations are recovering slightly, and perceived risk seems contained.

Figure 1: Top panel: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), all in %. Middle panel: 10 year-3 month Treasury spread (blue), 10 year-2 year Treasury spread (red), both in %. Bottom panel: VIX (teal, left scale), Economic Policy Uncertainty, 7 day centered moving average (salmon, right scale).  NBER defined recession dates shaded gray (from beginning of month after peak month to end of trough month). Source: FRB via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) , FRED, policyuncertainty.com, NBER and author’s calculations.

The top panel of Figure 1 shows that the standard breakeven for 5 year horizon has stabilized; the adjusted for inflation risk premium/liquidity premium indicator was also stable at end-August, indicating 1.18% inflation on average.

Expectations as proxied by term spreads suggest that growth trends bottomed out in mid-July, after peaking in mid-March. They’re now rising slightly over the last two weeks.

Finally, a market based measure of risk (the VIX) has is relatively quiescent. So too is the newspaper account based Baker-Bloom-Davis measure of policy uncertainty. This is true despite the rising political uncertainty regarding passage of the reconciliation and infrastructure bills, and more importantly, the raising of the debt ceiling. Credit spreads have also failed (so far) to evidence much reaction:

Notes: The ICE BofA High Yield Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of investment grade bonds BB and below, and a spot Treasury curve.  Source: FRED, accessed 9/25/2021.

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Economics

Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Authored by Mike Shedlock via MishTalk.com,

Central bank digital currencies…

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Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Authored by Mike Shedlock via MishTalk.com,

Central bank digital currencies are on the way. The German Central Bank just embraced a digital euro. Let's discuss the risks...

Fintech and Global Payments

 Jens Weidmann, president of the Bundesbank, Germany's central bank gave the opening speech at the digital conference “Fintech and the global payments landscape – exploring new horizons

Exploring a Digital Euro

The title of Weidmann speech was Exploring a Digital Euro

Emphasis mine with my thoughts in braces [ ]

Paper money, for instance, was first introduced in China about a thousand years ago. This innovation eventually transformed the payments system. Today, digitalisation is on the cusp of overhauling payments.

Central banks have to work out how to respond to this challenge. One possibility is the issuing of central bank digital currencies (CBDCs). According to a survey by the Bank for International Settlements (BIS), the share of central banks conducting work on CBDC for general or wholesale use rose to 86% last year. Many of them have made significant progress.

Two months ago, the Eurosystem launched a project to investigate key questions regarding the design of a CBDC for the euro area. The aim of the investigation is to prepare us for the potential launch of a digital euro. Experiments have already shown that, in principle, a digital euro is feasible using existing technologies.

As my ECB colleague Fabio Panetta has stressed, a digital euro would have “no liquidity risk, no credit risk, no market risk,” in this way resembling cash.

[No Risk? Really] 

The protection of privacy would thus be a key priority in terms of maintaining people’s trust. European data protection rules would have to be complied with. Nevertheless, a digital euro would not be as anonymous as cash. In order to prevent illicit activities such as money laundering or terrorist financing, legitimate authorities would have to be able to trace transactions in individual, justified cases.

[Every Case]

But designing CBDC involves curbing its risks. In order to prevent excessive withdrawals of bank deposits, it has been suggested that a cap be placed on the amount of digital euro that each individual can hold. Or that digital euro holdings in excess of a certain limit could be rendered unattractive by applying a penalty interest rate.

[No Risk? I thought you said there was no risk.]

If a digital euro were accessible for non-residents, this could impact on capital flows and euro exchange rates. What this calls for is international and multilateral collaboration.

[Wait a second, is this another risk?]

Self-reinforcing loops and “lock-in” effects may tie users to one platform and exclude competitors. Some observers have been reminded of “Hotel California”, the famous song by the American rock band “The Eagles”: it’s such a lovely place, with plenty of room; but once inside you can never leave.

[Hotel Central Bank: Once inside you can never leave.]

The Eurosystem has no commercial interest in user data or behaviour. A digital euro could therefore help to safeguard what has always been the essence of money: trust.

[Ah yes, trust that interest rates won't go even more negative, money won't expire, and withdrawals won't be capped].

Central banks need to be at the cutting edge of technology. Otherwise, they cannot provide the backbone of payment systems and offer safe and trusted money for the digital age.

This has prompted all major central banks to start exploring issuance of CBDC. However, our success as a money creator will depend not so much on speed, but on the trust of those who are supposed to use the money.

Europe Moving Ahead

It appears Europe is moving ahead faster than the Fed. 

The risks are obvious.

  • Expiring Money

  • Increasingly Negative Interest Rates

  • Withdrawals Capped

  • Withdrawals Taxed 

  • Gifts Taxed

And once inside you can never leave. 

Livin' it up at the Hotel Fedifornia has a nice ring to it. ECBifornia isn't as catchy. 

* * *

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Tyler Durden Sat, 09/25/2021 - 13:00
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