Sive Morten
Special Consultant to the FPA
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Fundamentals
This week we mostly has got the volatility only. Upward action in the middle of the week was a bit surprising, as market had no fundamental reasons to do it. But later in the week, common sense returned and with double comments as from J.Powell as C. Lagarde - market has turned to reasonable action.
Market overview
The dollar surged to a more than two-year high on Friday, continuing to draw support from Federal Reserve Chair Jerome Powell's comments on Thursday that seemed to back a half a percentage point tightening at next month's policy meeting, as well as his remarks on a likely consecutive rate hikes this year. The dollar index, a gauge of the greenback's value against six major currencies, hit 101.33, the highest since March 2020, so far this year, the dollar index has gained 5.7%.
A half-point interest rate increase "will be on the table" when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year, Fed Chair Jerome Powell said Thursday in comments that pointed to an aggressive set of Fed actions ahead. With inflation running roughly three times the Fed's 2% target, "it is appropriate to be moving a little more quickly," Powell said in a discussion of the global economy at the meetings of the International Monetary Fund. "Fifty basis points will be on the table for the May meeting."
In likely his last public remarks before the Fed's next session, Powell also said he felt investors currently anticipating a series of half-point hikes were "reacting appropriately, generally," to the Fed's emerging fight against rising prices. His comments appeared to pin down an expected rate path much steeper than projected at the Fed's March meeting, when policymakers at the median anticipated the target overnight federal funds rate would be increased to 1.9% by year's end.
Traders in contracts linked to the overnight federal funds rate currently expect the Fed to increase it to a range between 2.75% and 3% by then, a pace that would involve half-point hikes at three upcoming meetings and quarter-point increases at the year's three other sessions.
That would take the Fed's target rate beyond the "neutral" level and into territory that would begin to restrict economic activity, marking one of the faster turnarounds of U.S. monetary policy. In addition, the Fed is expected to begin reducing its asset holdings in a step that will further tighten credit conditions for businesses and households.
In the cycle starting in mid-2004, for example, it took about two years to reach what a New York Fed model estimates the neutral rate was then, around 5.25%. It took a year, beginning in late 1993, to reach neutral during a cycle often cited as a possible parallel to this one by bringing inflation down without a recession.
Consumer inflation exceeded 8% in March, the fastest since the 1980s, near the end of the era when Paul Volcker as Fed chair used punishing interest rates and two recessions to break rounds of annual price increases that ran as high as 14.5%. But reasons to question that belief are growing amid debate over whether the pandemic has changed how inflation works for good, whether decades of low inflation was as durable as it seemed, and whether the dynamics of the 1970s could recur.
One Fed staffer noted in a recent paper that the case for concluding that inflation psychology was truly "anchored" may be weaker than thought. An analysis by New York Fed economists this week concluded that "sometime in the fall of 2021" inflation shifted from being driven by "transitory shocks and outliers" to a "common persistent component" spread across the economy. That's about when Powell started getting worried and the Fed began pivoting to a tougher policy.
Minutes of the Fed's March meeting showed developing concern that the Fed may be losing what officials regard as the crucial fight to keep public inflation expectations at bay - the very struggle Volcker is credited with winning in the 1980s. Long-term inflation expectations are considered key to how wages and prices are set, and at that meeting "a few participants judged that, at the current juncture, a significant risk...was that elevated inflation and inflation expectations could become entrenched."
Futures contracts tied to the Fed's benchmark rate see it reaching nearly 3% this year, a big step beyond neutral and into "restrictive" territory. Economists including former Treasury official and Peterson fellow Karen Dynan see it topping out at 4% in 2023, a level not seen in 15 years. In the past, even approaching neutral has proved dicey.
The potential speed of the Fed's action has led some economists to warn a recession may now be more likely if business and households cut back spending more than anticipated as borrowing costs rise, or stock and other assets prices drop in value and eat into household wealth.
Rising yields on both short- and long-term bonds are increasing costs for a variety of loans -- most notably the 30-year mortgage commonly used to finance home purchases, where the average rate rose to over 5% this week -- a key channel through which the Fed influences the economy.
U.S. home sales dropped to the lowest level in nearly two years in March as house prices raced to a record high, and could decline further with the fixed 30-year mortgage rate hitting 5.13%. Existing home sales dropped 2.7% to a seasonally adjusted annual rate of 5.77 million units last month, the lowest level since June 2020 when sales were rebounding from the COVID-19 lockdown slump. Data for February was revised sharply down to a rate of 5.93 million units from the previously reported 6.02 million units. It was the second straight monthly sales decline.
The housing market is the sector of the economy most sensitive to interest rates. While the bulk of the recent decline in sales reflects higher home prices amid tight supply, some economists said rising borrowing costs were also at play.
U.S. single-family homebuilding and permits tumbled in March as soaring mortgage rates increased costs, but residential construction remains underpinned by a severe shortage of houses. The report from the Commerce Department on Tuesday also showed a record backlog of homes approved for construction, but yet to be started. It followed on the heels of news on Monday that sentiment among single-family homebuilders dropped to a seven-month low in April.
Fed funds futures have started to price in a third 50-basis-point hike in July, after the same increase in May and June, and nearly 250 basis points of cumulative increases in 2022.
By far the biggest player, the Fed is expected to finalize its plans at a meeting in early May. Minutes of its March discussion said policymakers had largely agreed to cut up to $95 billion monthly from their holdings, about $1.1 trillion annually. What it means for the economy depends partly on how markets react. The Fed from 2017 to 2019 trimmed its balance sheet by about $650 billion, but that led to a shortage of banking system reserves, a spike in short-term interest rates, and a quick reversal to put liquidity - quickly - back into the system.
ECB President Christine Lagarde struck a dovish tone on Thursday by saying the central bank might need to cut its growth outlook a day after ECB dove Luis de Guindos joined some policymakers in calling for an early end of the bank's asset buying scheme coupled with a rate rise in July.
Investors are also waiting for Sunday's run-off of French presidential elections between incumbent Emmanuel Macron and far-right challenger Marine Le Pen, with the latest polls showing Macron winning with 55% of the votes. Le Pen's win could provoke tensions with European allies and weigh on the euro, analysts said.
Fed cycles and the US Dollar
A months-long rally in the dollar may be reaching its peak as the Federal Reserve gears up to deploy more interest rate hikes, according to the currency's trading patterns in past tightening cycles. The dollar has risen around 7% against a basket of currencies in the past year to its highest level since March 2020, boosted in part by expectations the Fed is ready to employ robust rate hikes to tame the worst inflation in nearly 40 years.
Those gains are largely consistent with the dollar's behavior during the last four rate hike cycles, which has seen the U.S. currency climb an average of 2.2% in the 12 months before the central bank started raising interest rates. In three out of the last four hiking cycles, however, the dollar index went on to pare some of its gains, losing an average of 1.4% between the first and last rate increase, according to a Reuters analysis of Refinitiv data.
Analysts at Goldman Sachs wrote that the current projections of Fed tightening are comparable to the central bank’s rate path in 1994-1995, when policymakers raised rates by 300 basis points for the steepest hiking cycle in decades. The Fed raised rates by 25 basis points in March and investors are projecting nearly 260 basis points of cumulative rate increases through next February.
While the dollar strengthened in the months prior to the first increase in 1994, it fell 8.4% by the time the Fed was through, as rate hikes by other global central banks closed the gap between U.S. yields and those in other currencies, Goldman’s analysts said in a recent report.
Although the gap between yields on U.S. debt and foreign government bonds has widened in recent weeks, that dynamic could change if other central banks grow more aggressive in monetary policy, or if U.S. data shows growth starting to slow.
For now, however, momentum appears to be on the greenback's side. The dollar index is up 2.3% for April, on pace for its best month since June 2021. The index is also on track for its fourth straight month of gains, the longest such streak in two years. Sustained dollar strength could be a mixed bag for investors, corporations and governments. While a strong dollar may help the Fed tame inflation, it can exacerbate rising prices in economies whose currencies have weakened.
The pressure on corporates could be temporary, though, if dollar bears are right. Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank, believes the dollar could continue rising in coming months but will likely retreat during the course of the Fed's rate hiking cycle, especially if other central bank's grow more hawkish. However, "that's a story for the second half of the year, or even 2023," he said.
Goldman Sachs, meanwhile, warns the Fed faces "a hard path to a soft landing".
The most hot topic for the next week is French elections result.
Unlike in 2017, investors haven't had to fret this year that French presidential elections would result in "Frexit". If opinion polls are right, they don't need to worry either that far-right candidate Marine Le Pen may win Sunday's runoff vote. Incumbent Emmanuel Macron, who has led the euro area's second-biggest economy for five years, enjoys a 12-point lead over Le Pen, and emerged the stronger candidate after a key TV debate. French bond yield premia over top-rated Germany are stable as is the euro, unlike in 2017 when Le Pen espoused ditching the single currency. Still, a Le Pen presidency, which would trigger a constitutional crisis, has never been closer. And even if Macron wins, he cannot count on a majority in June's parliament election. So, the real test for markets may be yet to come. And history shows opinion polls can get election outcomes wrong.
Conclusion:
This time we do not need to tell many things. Everything goes with the same vector. Once Russia is started special military operation and first sanctions were imposed, we warned that it leads economy to acceleration of structural crisis events. In fact, they would start without any geopolitical tensions, but its progress would be much slower and smoother. But, in the way how it stands now - it just leads to fast acceleration of the process. Based on the comments that we've mentioned above - investors start to suspect something, and there are more and more opinions on recession subject that Fed just will kill the economy with the rate hike that they intend to follow. Goldman Sachs, Standard Chartered and some other big whales support our view that the dollar should keep dominant role through the 2022 and turns to weakness next year, but not with the reasons that they suggest - of rising interest rates by other central banks. Absolutely not. The weakness of the dollar accelerates with the drying external resources that support now the US economy. When this fiscal "aid" dries, it should naked the structural problems. J. Powell clearly understands it but speaks about it only by hints - "Our goal is to use our tools to get demand and supply back in synch".
Last week we've said that to balance supply and demand sides in the US - dollar be devalued two times in real value and three times in nominal value. The reason why markets show no reaction by far and stocks keep going higher is because no tightening starts yet:
To provide the real and honest view on current situation and the terrible final that is waiting us we need to listen of IMF. During an IMF “Debate on the Global
Economy” Thursday, International Monetary Fund Director Kristalina Georgieva hinted that the world’s economic overlords may have screwed us all. One example the IMF Director put forward as a decision that created unintended consequences was the massive amount of money printed as an attempt at stimulating the economy during the COVID-19 pandemic.
IMF Director sums it up - We printed too much money and didn’t think of unintended consequences. Georgieva also said “we are already out of time” when it comes to climate change and criticized leaders for “forgetting” the issue during the Covid pandemic. The IMF head compared her colleagues to a bunch of eight-year-olds chasing after a soccer ball and not focusing on what’s happening throughout the rest of the field.
Many investors and analysts comfort with the illusion that situation should normalize sooner rather than later. We're not deluding ourselves and acknowledge that world in fact now stands in WW III. Finland makes step to the NATO joining, there is more and more troops deploying in Eastern Europe, so, we're skeptic on peaceful result in the region and should be ready for more escalation, especially in Southern Ukraine. This makes unrealistic now any suggestions of analysts, who rely only on financial factors, and do not take in the consideration geopolitical component.
That's being said, while the US rivals feel weak as they care the major burden of devastating sanctions, the US dollar should keep domination through 2022. Later, with deteriorating geopolitical situation and useless of all Fed efforts to control inflation, the dollar devaluation should become evident and comes not because of other central banks steps but because of inner US economy problems.
This week we mostly has got the volatility only. Upward action in the middle of the week was a bit surprising, as market had no fundamental reasons to do it. But later in the week, common sense returned and with double comments as from J.Powell as C. Lagarde - market has turned to reasonable action.
Market overview
The dollar surged to a more than two-year high on Friday, continuing to draw support from Federal Reserve Chair Jerome Powell's comments on Thursday that seemed to back a half a percentage point tightening at next month's policy meeting, as well as his remarks on a likely consecutive rate hikes this year. The dollar index, a gauge of the greenback's value against six major currencies, hit 101.33, the highest since March 2020, so far this year, the dollar index has gained 5.7%.
"The macro fundamentals are still pointing to a higher dollar as short-term Treasury yields vs comparable maturity on sovereign yields are positive and inflation is high globally," said Stan Shipley, fixed income strategist, at Evercore ISI in New York. These macro drivers work well until the dollar reaches a level where economic growth is significantly impaired and the credit worthiness of U.S. government debt is suspect," he added.
A half-point interest rate increase "will be on the table" when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year, Fed Chair Jerome Powell said Thursday in comments that pointed to an aggressive set of Fed actions ahead. With inflation running roughly three times the Fed's 2% target, "it is appropriate to be moving a little more quickly," Powell said in a discussion of the global economy at the meetings of the International Monetary Fund. "Fifty basis points will be on the table for the May meeting."
In likely his last public remarks before the Fed's next session, Powell also said he felt investors currently anticipating a series of half-point hikes were "reacting appropriately, generally," to the Fed's emerging fight against rising prices. His comments appeared to pin down an expected rate path much steeper than projected at the Fed's March meeting, when policymakers at the median anticipated the target overnight federal funds rate would be increased to 1.9% by year's end.
Traders in contracts linked to the overnight federal funds rate currently expect the Fed to increase it to a range between 2.75% and 3% by then, a pace that would involve half-point hikes at three upcoming meetings and quarter-point increases at the year's three other sessions.
That would take the Fed's target rate beyond the "neutral" level and into territory that would begin to restrict economic activity, marking one of the faster turnarounds of U.S. monetary policy. In addition, the Fed is expected to begin reducing its asset holdings in a step that will further tighten credit conditions for businesses and households.
In the cycle starting in mid-2004, for example, it took about two years to reach what a New York Fed model estimates the neutral rate was then, around 5.25%. It took a year, beginning in late 1993, to reach neutral during a cycle often cited as a possible parallel to this one by bringing inflation down without a recession.
Consumer inflation exceeded 8% in March, the fastest since the 1980s, near the end of the era when Paul Volcker as Fed chair used punishing interest rates and two recessions to break rounds of annual price increases that ran as high as 14.5%. But reasons to question that belief are growing amid debate over whether the pandemic has changed how inflation works for good, whether decades of low inflation was as durable as it seemed, and whether the dynamics of the 1970s could recur.
"It is essentially religion whether you decide to include the 1970s or not in your inflation expectation models," said Adam Posen, president of the Peterson Institute for International Economics. "If you say...we have had 40 years of low inflation and therefore long-term inflation expectations are anchored, that gets you a more benign scenario" than if you think tight labor markets, the reversal of globalization or other factors indicate "we are slipping a bit in regime."
One Fed staffer noted in a recent paper that the case for concluding that inflation psychology was truly "anchored" may be weaker than thought. An analysis by New York Fed economists this week concluded that "sometime in the fall of 2021" inflation shifted from being driven by "transitory shocks and outliers" to a "common persistent component" spread across the economy. That's about when Powell started getting worried and the Fed began pivoting to a tougher policy.
Minutes of the Fed's March meeting showed developing concern that the Fed may be losing what officials regard as the crucial fight to keep public inflation expectations at bay - the very struggle Volcker is credited with winning in the 1980s. Long-term inflation expectations are considered key to how wages and prices are set, and at that meeting "a few participants judged that, at the current juncture, a significant risk...was that elevated inflation and inflation expectations could become entrenched."
Futures contracts tied to the Fed's benchmark rate see it reaching nearly 3% this year, a big step beyond neutral and into "restrictive" territory. Economists including former Treasury official and Peterson fellow Karen Dynan see it topping out at 4% in 2023, a level not seen in 15 years. In the past, even approaching neutral has proved dicey.
"Every time in recent history the Fed even just approached neutral, the economy rolled over in short order," Piper Sandler economist Roberto Perli wrote recently. "So, the risk is that the (Fed) may be too focused on bringing down inflation and willing to roll the dice with respect to growth and the labor market."
The potential speed of the Fed's action has led some economists to warn a recession may now be more likely if business and households cut back spending more than anticipated as borrowing costs rise, or stock and other assets prices drop in value and eat into household wealth.
"I would put the probability that we enter into a recession over the next 12 months of about one in three, and that is rising," Moody's Analytics' chief economist Mark Zandi said earlier Thursday at a session on inflation that Powell also addressed. With aggressive rate hikes and balance sheet reductions ahead, "it's raised the risks that the Fed navigating things gracefully, and landing...the economic plane on the tarmac, is going to be much more difficult."
Rising yields on both short- and long-term bonds are increasing costs for a variety of loans -- most notably the 30-year mortgage commonly used to finance home purchases, where the average rate rose to over 5% this week -- a key channel through which the Fed influences the economy.
U.S. home sales dropped to the lowest level in nearly two years in March as house prices raced to a record high, and could decline further with the fixed 30-year mortgage rate hitting 5.13%. Existing home sales dropped 2.7% to a seasonally adjusted annual rate of 5.77 million units last month, the lowest level since June 2020 when sales were rebounding from the COVID-19 lockdown slump. Data for February was revised sharply down to a rate of 5.93 million units from the previously reported 6.02 million units. It was the second straight monthly sales decline.
The housing market is the sector of the economy most sensitive to interest rates. While the bulk of the recent decline in sales reflects higher home prices amid tight supply, some economists said rising borrowing costs were also at play.
"This is exactly what the doctor ordered if you are a Fed official looking to brake the economy and slow demand to fight inflation, but if you are a homebuyer you are getting it from both sides with rising mortgage rates and sky-high home prices that just won't stop inflating," said Christopher Rupkey, chief economist at FWDBONDS in New York.
U.S. single-family homebuilding and permits tumbled in March as soaring mortgage rates increased costs, but residential construction remains underpinned by a severe shortage of houses. The report from the Commerce Department on Tuesday also showed a record backlog of homes approved for construction, but yet to be started. It followed on the heels of news on Monday that sentiment among single-family homebuilders dropped to a seven-month low in April.
"Our goal is to use our tools to get demand and supply back in synch…and do so without a slowdown that amounts to a recession.But undercutting the rapid pace of price increases, which have more than offset wage gains for most Americans and become a pressing political issue as well, is "absolutely essential" Powell said. Economies do not work without price stability. We have had an expectation that inflation would peak around this time and come down over the course of the rest of the year and then further," Powell said. "These expectations have been disappointed in the past...We are not going to count on help from supply side healing. We are going to be raising rates."
"It is going to be very challenging. Powell is intimating that avoiding a recession will not be easy. That is new," said Tim Ghriskey, senior portfolio strategist with Ingalls & Snyder in New York.
Fed funds futures have started to price in a third 50-basis-point hike in July, after the same increase in May and June, and nearly 250 basis points of cumulative increases in 2022.
"Even if the Fed does back-to-back-to-back 50 basis-point hikes, that's still at a rate that is at the bottom end or below neutral," said Calvin Tse, head of Americas Developed Markets Strategy (FX, Rates, Equities), at BNP Paribas in New York. They likely don't feel that it's excessive tightening because even after these hikes are put in place, policy will still be loose, still accommodative."
By far the biggest player, the Fed is expected to finalize its plans at a meeting in early May. Minutes of its March discussion said policymakers had largely agreed to cut up to $95 billion monthly from their holdings, about $1.1 trillion annually. What it means for the economy depends partly on how markets react. The Fed from 2017 to 2019 trimmed its balance sheet by about $650 billion, but that led to a shortage of banking system reserves, a spike in short-term interest rates, and a quick reversal to put liquidity - quickly - back into the system.
ECB President Christine Lagarde struck a dovish tone on Thursday by saying the central bank might need to cut its growth outlook a day after ECB dove Luis de Guindos joined some policymakers in calling for an early end of the bank's asset buying scheme coupled with a rate rise in July.
Investors are also waiting for Sunday's run-off of French presidential elections between incumbent Emmanuel Macron and far-right challenger Marine Le Pen, with the latest polls showing Macron winning with 55% of the votes. Le Pen's win could provoke tensions with European allies and weigh on the euro, analysts said.
Fed cycles and the US Dollar
A months-long rally in the dollar may be reaching its peak as the Federal Reserve gears up to deploy more interest rate hikes, according to the currency's trading patterns in past tightening cycles. The dollar has risen around 7% against a basket of currencies in the past year to its highest level since March 2020, boosted in part by expectations the Fed is ready to employ robust rate hikes to tame the worst inflation in nearly 40 years.
Those gains are largely consistent with the dollar's behavior during the last four rate hike cycles, which has seen the U.S. currency climb an average of 2.2% in the 12 months before the central bank started raising interest rates. In three out of the last four hiking cycles, however, the dollar index went on to pare some of its gains, losing an average of 1.4% between the first and last rate increase, according to a Reuters analysis of Refinitiv data.
"It is entirely possible that the dollar overshoots on the high side, revisiting levels we saw eight-nine years ago, but we think we are getting pretty close to a tipping point," said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Analysts at Goldman Sachs wrote that the current projections of Fed tightening are comparable to the central bank’s rate path in 1994-1995, when policymakers raised rates by 300 basis points for the steepest hiking cycle in decades. The Fed raised rates by 25 basis points in March and investors are projecting nearly 260 basis points of cumulative rate increases through next February.
While the dollar strengthened in the months prior to the first increase in 1994, it fell 8.4% by the time the Fed was through, as rate hikes by other global central banks closed the gap between U.S. yields and those in other currencies, Goldman’s analysts said in a recent report.
Although the gap between yields on U.S. debt and foreign government bonds has widened in recent weeks, that dynamic could change if other central banks grow more aggressive in monetary policy, or if U.S. data shows growth starting to slow.
"The moment the markets sniff properly that the Fed is done with their hawkishness amid the backdrop of slowing U.S. data, then the dollar will fall off and we can get back to looking at interest rate differentials," said Richard Benson, co-chief investment officer at Millennium Global Investments.
For now, however, momentum appears to be on the greenback's side. The dollar index is up 2.3% for April, on pace for its best month since June 2021. The index is also on track for its fourth straight month of gains, the longest such streak in two years. Sustained dollar strength could be a mixed bag for investors, corporations and governments. While a strong dollar may help the Fed tame inflation, it can exacerbate rising prices in economies whose currencies have weakened.
"We think we are getting very close to that point where companies are going to have to start admitting that the stronger dollar is hurting the translation of their earnings and hurting international competitiveness," said Morgan Stanley’s Shalett.
The pressure on corporates could be temporary, though, if dollar bears are right. Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank, believes the dollar could continue rising in coming months but will likely retreat during the course of the Fed's rate hiking cycle, especially if other central bank's grow more hawkish. However, "that's a story for the second half of the year, or even 2023," he said.
"Prepare for a hard landing," Deutsche Bank shrilled in a Wednesday report. Flagging the possibility of a Fed funds rate in the 4.5-5% range and euro zone rates at 2-2.5%, Deutsche chief economist David Folkerts-Landau said a late-2023 U.S. recession was now a baseline scenario.
Goldman Sachs, meanwhile, warns the Fed faces "a hard path to a soft landing".
The most hot topic for the next week is French elections result.
Unlike in 2017, investors haven't had to fret this year that French presidential elections would result in "Frexit". If opinion polls are right, they don't need to worry either that far-right candidate Marine Le Pen may win Sunday's runoff vote. Incumbent Emmanuel Macron, who has led the euro area's second-biggest economy for five years, enjoys a 12-point lead over Le Pen, and emerged the stronger candidate after a key TV debate. French bond yield premia over top-rated Germany are stable as is the euro, unlike in 2017 when Le Pen espoused ditching the single currency. Still, a Le Pen presidency, which would trigger a constitutional crisis, has never been closer. And even if Macron wins, he cannot count on a majority in June's parliament election. So, the real test for markets may be yet to come. And history shows opinion polls can get election outcomes wrong.
Conclusion:
This time we do not need to tell many things. Everything goes with the same vector. Once Russia is started special military operation and first sanctions were imposed, we warned that it leads economy to acceleration of structural crisis events. In fact, they would start without any geopolitical tensions, but its progress would be much slower and smoother. But, in the way how it stands now - it just leads to fast acceleration of the process. Based on the comments that we've mentioned above - investors start to suspect something, and there are more and more opinions on recession subject that Fed just will kill the economy with the rate hike that they intend to follow. Goldman Sachs, Standard Chartered and some other big whales support our view that the dollar should keep dominant role through the 2022 and turns to weakness next year, but not with the reasons that they suggest - of rising interest rates by other central banks. Absolutely not. The weakness of the dollar accelerates with the drying external resources that support now the US economy. When this fiscal "aid" dries, it should naked the structural problems. J. Powell clearly understands it but speaks about it only by hints - "Our goal is to use our tools to get demand and supply back in synch".
Last week we've said that to balance supply and demand sides in the US - dollar be devalued two times in real value and three times in nominal value. The reason why markets show no reaction by far and stocks keep going higher is because no tightening starts yet:
Attempting to explain why stock markets have been relatively stable this month in the face of all the hawkishness, Citi's global strategist Matt King concluded: "The reality is that tightening hasn't even started yet."Liquidity specialist Michael Howell's CrossBorder Capital estimates that liquidity provided by major central banks jumped another $159 billion during March to $29.6 trillion, up some $7 trillion since before the pandemic.
To provide the real and honest view on current situation and the terrible final that is waiting us we need to listen of IMF. During an IMF “Debate on the Global
Economy” Thursday, International Monetary Fund Director Kristalina Georgieva hinted that the world’s economic overlords may have screwed us all. One example the IMF Director put forward as a decision that created unintended consequences was the massive amount of money printed as an attempt at stimulating the economy during the COVID-19 pandemic.
“At that time, we did recognize that may lead to too much money in circulation, too few goods, but didn’t really quite think through the consequence in a way that upfront would have informed better what we do,” she said.
IMF Director sums it up - We printed too much money and didn’t think of unintended consequences. Georgieva also said “we are already out of time” when it comes to climate change and criticized leaders for “forgetting” the issue during the Covid pandemic. The IMF head compared her colleagues to a bunch of eight-year-olds chasing after a soccer ball and not focusing on what’s happening throughout the rest of the field.
Many investors and analysts comfort with the illusion that situation should normalize sooner rather than later. We're not deluding ourselves and acknowledge that world in fact now stands in WW III. Finland makes step to the NATO joining, there is more and more troops deploying in Eastern Europe, so, we're skeptic on peaceful result in the region and should be ready for more escalation, especially in Southern Ukraine. This makes unrealistic now any suggestions of analysts, who rely only on financial factors, and do not take in the consideration geopolitical component.
That's being said, while the US rivals feel weak as they care the major burden of devastating sanctions, the US dollar should keep domination through 2022. Later, with deteriorating geopolitical situation and useless of all Fed efforts to control inflation, the dollar devaluation should become evident and comes not because of other central banks steps but because of inner US economy problems.