Sive Morten
Special Consultant to the FPA
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Fundamentals
Global events are running with high speed and we barely in time to cover them in our reports. Thankfully, our telegram channel makes good job now, so, I could just post the links on some events and not re-print them here to save the space and your phyche
. Currently we're living in times when in fact there is no room for market-specific factors but everything is driving by macro economics. Thus, this report and probably tomorrow's Gold report we dedicate to it, with a bit more political issues in gold report.
Today we consider US budget, recent data on US Real estate market and explain why we do not believe in fast rebound of EU and UK, why we have downside targets of 0.9 and 0.95 by EUR and GBP correspondingly.
The US
The first thing that looks very bright now is markets' uncertainty. Investors are totally frustrating, and do not understand where to run. Just take a look at the headlines:
U.S. yields slide from multi-year highs on hopes of Fed pivot. This one stands for yesterday. And this one is the same day but few hours earlier - Wall St loses ground on fears of prolonged Fed hawkishness. With this sentiment you could about everything but long term investing, and hardly any significant upside action is possible in this atmosphere. Concerning Fed pivot I would say like this:
Fed has pushed the rate up to 3.5% already with expectations of more rising, and possibly aggressive rising above 5%. WSJ tells that Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes. But what do we have? CPI/PPI numbers are not dropping. Yes, the pace if inflation rally has decreased, mostly it stands stable, but the rate hike circle is unprecedented, but no impact on inflation. About what Fed pivot we could talk in current conditions?
Let's go further. Treasury bonds are so oversold that for the last 47 years there is no historical context that we could compare to with what is happening now.
Federal Reserve and White House officials spent last week quizzing investors and economists about the risks of a British-style meltdown at home. The answer they got back, according to four people at separate institutions who were in such conversations and who spoke on the condition of anonymity to describe private meetings, was that it probably could — though a crash does not appear to be imminent. As the Biden administration did its own research into the potential for a meltdown, other market participants relayed the same message: The risk of a financial crisis has grown as central banks have sharply raised interest rates.
Officials at the Fed, Treasury and White House are among those trying to figure out whether the United States could experience its own market-shuddering meltdown, one that could prove costly for households while complicating America’s battle against rapid inflation.
Yet they also voiced reasons for concern: It is impossible to know what might break until something does. Markets are large and intertwined, and comprehensive data is hard to come by. Given how much central bank policy has shifted around the world in recent months, something could easily go wrong. A financial disaster could force the Fed to deviate from its plan to control the fastest inflation in four decades, which includes raising rates rapidly and allowing its bond portfolio to shrink. Officials have in the past bought large sums of Treasury bonds in order to restore stability to flailing markets — essentially the opposite of their policy today.
The Treasury Borrowing Advisory Committee, an advisory group of market participants, has been asked in its latest questionnaire about a possible Treasury program to buy back government debt.
The Bank of America warns that the US Treasury market is under threat of large-scale forced sales. The world's largest bond market. And who doubts? Just take a look at Japan, which has made strong JPY intervention yesterday. With the foreign reserves around $1.3 Trln, how do you think, where they take the USD to sell and support the yen? Right, they sell them, they sell US Treasuries from their reserves. And soon all other central banks start to do the same, because currently nobody could hold the competition with Fed reserve is rates rally. SnB has started to sell FANG shares (Facebook, Amazon, Netflix, Google), we've talked about it last week. It means that situation stands really thin as foreign investors is starting to sell US assets to finance own deficits, especially when it comes from SnB that was seemed to be most stable among other European central banks. So, the USD deficit stands everywhere now.
The Treasury in the UK is transferring BILLIONS to the Bank of England to cover losses from quantitative easing, and people are only joking about the prime minister who lasted 45 days? The global game of creating a screen, the central bank's cartel pyramid in action... Understand the level of manipulation and how close the whole system is to being torn to shreds.
So, Bank of Japan starting emergent bond buying and currency interventions, BoE just was holding bond-buying to avoid collapse, Fed is calling to the prof. to consider UK scenario - should we could keep the image that everything is OK and nothing is going on? Meantime, 10-year US yield hits 4.25% while 2-year rate is coming to 5% and all this stuff in the US currency zone, not in Zimbabwe or Bangladesh!!!
Meantime, mortage rates are becoming toxic for the economy. Here is, in Russia, joke starts that domestic official mortage rate is lower than in the US. 7% is a highest level since 2022 and 127% YoY jump is a fastest ever rate change.
Real estate includes construction services, materials costs, real estate agencies, financial intermediaries, transport, utilities, energy and social infrastructure, costs for furniture, household and digital appliances, home improvement, and so on. About 30% of the US economy directly or indirectly serves this segment. It was real estate that acted as a trigger and catalyst for the crisis processes of 2007-2009.
The value of real estate to disposable income is growing rapidly, reaching an unprecedented historical scale of 253% compared to 275% at the peak of the mortgage bubble in 2006. The relatively safe level is 180-200%, i.e. the property is overvalued by 30%. The collapse of the bubble is inevitable, which will be accelerated on the trajectory of rising mortgage rates.
Housing starts dropped 8.1% to a seasonally adjusted annual rate of 1.439 million units last month. Data for August was revised down to a rate of 1.566 million units from the previously reported 1.575 million units. Existed homes sales are falling 8 months in a row:
Demand has already collapsed by almost 30% and will continue to decline until prices normalize. This will be reflected in 30% of the American economy, which is directly or indirectly tied to real estate. But the banks also have problems ahead – the growth of delays and write-offs is just beginning. Here is overall performance of Real Estate US market Index. Worst performance in 10 years, excluding Covid collapse.
The real estate market in the US is another construction with high detonation potential with all the ensuing destructive consequences. At the moment , the mortgage lending market in the United States is valued at $ 12.7 trillion – an increase of $ 2 trillion since January 2020 . This is almost comparable to the pace of the mortgage bubble of 2005-2008 (2.5 trillion growth over a comparable period).
All this happened on a background of a record–breaking increase in real estate prices in history - about 40% increase in value in two years. High demand, backed by record prices, has made this market overheat. Sales on the secondary market were 6.6-6.8 million homes at the peak of the hype in 2021, which is close to the historical maximum of 7.1 million recorded in 2007. Now sales on the secondary market have collapsed by 30% (!) to 10-year lows (chart above), corresponding to a paralyzed market in the conditions of lockdowns in March-May 2020.
The amount of construction decreased by 20%, reaching the level of 2015-2016. Taking into account the cost of real estate and the volume of current income, the cost of mortgage loan expenses has more than doubled since 2020, and the burden on income corresponds to the historical maximum. As a result, the index of mortgage applications from the MBA collapsed two times, breaking through the lows of 2013, when the market was most depressed. The index of refinancing of new loans has practically zeroed out, reaching lows in 20 years.
Meantime, Foreign bank units have been accumulating cash reserves at the Federal Reserve, likely reflecting concerns that a dollar funding crunch could be looming as the U.S. central bank reduces its balance sheet and global economies face recession risks. Inflows to FBOs from their parent banks, has also grown, Fed data showed. As of Oct. 5, "Net due to related foreign offices" was $650.5 billion, up 14%
The decline in Fed reserves has been more rapid than what some had anticipated. As of Oct. 5, bank reserves at the Fed fell under $3 trillion to $2.972 trillion, down roughly $1.3 trillion from a peak of $4.3 trillion in December 2021. In the Fed's previous QT cycle, $1.3 trillion in liquidity was withdrawn in five years, analysts said.
Analysts said foreign banks' increased appetite for dollar liquidity could also be a function of the 3.15% paid by the Fed for those assets, or the so-called interest on reserve balances (IORB).
Now its time to take a look at US Budget report. First is, it was a delay for 10 days in release. As with companies earnings reports, delay is promised nothing good. And this has happened. Usually September is a proficit month. But not this time. The budget deficit has jumped for 430 Bln just in September! Helicopter money are launched again and in unbelievable scale. Just to compare it to "just" 125 Bln in 2020 Covid year, where stimulus was on top.
The third quarter was terrible for the budget. With a large handicap, to the anti-record of 2021, with a deficit of 537 billion. This time they showed a deficit of 861 billion – this is an outstanding level of deficit, comparing with previous periods.
The US was tring to "live within their means" until mid-summer, but it didn't work out. After the financial markets have begun to fall, they have decided to return to the previous paradigm – printing. Thus annual deficit was decreasing in March - July 2022, when it reached a low point of 962 billion and rose sharply to almost 1.4 trillion by September. Revenues dropped to 7% YoY (from 33-35%) while expenses has grown by 26%. That's why there is such a shortage.
The reason for the madness this time is overspending through the Ministry of Education on student loan subsidies of $ 400 billion under the Biden programme, where about 22 million borrowers can receive a deduction of $10 - 20K, depending on conditions and income. So, that Court has to block it for investigation.
It seems that more performance with expenses should be. The question is where to get the money?
Other issues to consider - EU, UK, Japan
The European Central Bank will go for another jumbo 75 basis point increase to its deposit and refinancing rates when it meets on Oct. 27 as it tries to contain inflation running at five times its target, a Reuters poll found. In the run-up to winter, forecasters are expecting the ECB to be more aggressive in tightening policy. By year-end the deposit and refinancing rates were forecast to be at 2.00% and 2.50% respectively compared to 1.25% and 2.00% predicted in a September poll.
The ECB targets inflation at 2.0%, yet it was 10.0% last month. It will average at a peak of 9.6% this quarter, higher than thought last month, before gradually drifting down but will not reach target until late 2024, the poll found.
The ECB has promised more hikes and begun a debate about unwinding its 3.3 trillion euros ($3.25 trillion) of bond purchases - the legacy of its fight against deflation in the last decade.
The Bank of England said it would start selling some of its huge stock of British government bonds from Nov. 1 but would not sell this year any longer-duration gilts that have been in the eye of a recent storm in the British government bond market. The central bank wants to reduce its 838 billion pounds ($948 billion) of government bonds acquired over more than a decade of crisis-fighting, from the global financial crisis to the coronavirus pandemic and its aftermath.
The BoE said sales in 2022 would be in short- and medium-maturity sectors, not bonds of more than 20 years. They suffered the biggest sell-offs in the recent market upheaval caused by the government's now-abandoned tax-cutting mini-budget. Analysts at consultancy Evercore said the plan looked "punchy" given the still volatile market conditions.
Barclays - The Federal Reserve may have to slow or stop shrinking its nearly $9 trillion balance sheet sooner than many now expect
The Barclays report said that due to changes in the financial system, total reserve levels are likely to come under pressure at higher levels, which means "the current level of bank reserves is probably closer to reserve scarcity than might have been the case before 2015."
The path the Fed is on right now will likely shave off just over $1 trillion from its balance sheet next year, which means reserves will become an issue for monetary policy before the end of the year, the report said.
Totally agree. We've talked about this that Fed has only two options and both are bad - either start printing money again or to ruin global and US economy with rate tightening and QT.
BNP Paribas expects the Federal Reserve to push the fed funds rate to a peak of 5.25% in the first quarter next year, higher than market expectations and a level that could tip the world's largest economy into recession, the bank said in a research note on Wednesday. The French bank is forecasting the U.S. economy to go into recession in the second quarter of 2023.
The chances that Japan will become the one who will crush everything are rising. Japan's inflation hits 8-year high in test of BOJ's dovish policy, BoJ keeps unprecedented QE policy, paying no attention to Yen collapse, which forces Ministry of Finance to make urgent bond market support. At the same time - they have no intention to stop. The Bank of Japan meets on Oct. 28 and is expected to continue running against the grain of global central banks by sticking to its extraordinary levels of stimulus - even as its policy exacerbates a politically unpopular plunge in the yen to a 32-year low beyond 150 per dollar. And they tell that do not see any immediate damage to the country’s banking sector from the central bank’s negative interest rate policy. Amazing...
EU will keep losing in this game
First is, Europe is paying an incredible price for the energy crisis. The trade deficit of the EU countries has reached a historical anti–record of 58 billion euros in August. Trade deficit amounted to 304 billion euros in the 8 months of 2022 against a surplus of 98 billion in 2021. So, taking in consideration the tendency, we could get around 500 Bln deficit by the end of the year. How much does the energy crisis cost to Europe? In the assessment of the trade balance, we are talking about 700-800 billion euros per year. The scale of de-industrialization is yet to be calculated – these processes become evident with a delay, but given the experience of the 70s, at least 10-15% of the industry will be cut off.
Europe may partially lose the competitiveness of industry through uncontrolled growth of energy costs. This is affected by both the record rate of weakening of the euro against the dollar (over 25% since May 2021 and over 15% in 2022), and the unprecedented growth rate of raw material prices: average gas prices increased almost 4 times from January to September 2022, coal prices increased 2.7 times, and oil almost 55%. In the structure of expenses, the main problem (by about three-quarters) is gas.
The main medium-term beneficiaries of the energy crisis in Europe are the United States and China. Europe position in this crisis keep going weaker, and if earlier Europe was the main distributor of capital on global markets in the face of a record current account surplus, now on the contrary, Europe will need foreign investment to close financial gaps. But there will be no investments in Europe, because all the excess cash flows that the subjects of the world economy are able to generate are absorbed by the United States, covering their own deficits.
In this sense, the task of the United States is to prevent the consolidation of Europe and the crystallization of a single viable decision-making center and the exclusion of strategic integration with Russia or China. It is critically important for the United States that Europe is a key trading partner, supplier of capital and technology, but at the same time does not create competition in strategic issues that are of primary importance to the United States.
Fragmentation and contradictions in Europe allow the United States to maintain leadership in the battle for capital and technology, covering its own exorbitant deficits, while having significantly greater imbalances and problems than anywhere else. Therefore, the United States will do everything possible so that Europe cannot consolidate and show subjectivity in choosing its own economic and political interests.
All other things being equal, in relative comparison the United States is again the best. the United States do the best – create controlled chaos and set vectors of "competitive diversity" in a complex, dynamic system. It's bad for everyone, but the USA is a little better than the rest. They have no choice, otherwise there is nothing to cover the record trade and budget deficits.
Conclusion:
Despite the difficulties that EU, US and UK have - they intend to keep tightening policy. While Fed is already there and has no intention to stop, UK should join the party on 1st of November and follow the Fed with rate rising on 3rd of November. EU also stands on the way of rate change. Very aggressive comments from the Fed members last week scare investors by their commitment to struggle inflation at any cost. We could see it by 2-year rate around 5% already. While US job market is relatively strong and inflation is not falling, Fed remains hawkish.
Meantime the structural crisis is spinning up. Attempts are being made to compensate for the problems, first of all, for households (Germany just recently allocated another 200 billion euros for this), but trillions are needed to compensate for structural problems, which it is unclear where to get and, most importantly, which will still increase inflation. Take a look at EU total debt chart and compare it to GDP growth.
If you wish you could calculate the growth rate of debt themselves and compare it with the growth rate of the economy over the same period. We remind you that if GDP growth is achieved due to a similar scale (in absolute numbers) debt growth, then this is not exactly the growth. Accountants have learned to transfer the numbers of the increase in debt to GDP growth for a long time, and if these indicators are not placed side by side in reports, then no one will notice anything. The trouble is that any businessman knows the real price of such growth.
You could see the same stuff on the US stock market. Recent growth was paid at 70%+ by shares corporate buybacks. Companies were taking loans for near zero rates and buy own stocks, pushing its price higher, increasing the capitalization and getting not bad profit. But when market turns - what do you gonna do with huge accumulated debt on the balance and stocks devaluation?
It is another reason to be worry. If monetary and economic authorities of almost all countries of the world are guided by similar principles today, it becomes a little uncomfortable...
To be continued...
Global events are running with high speed and we barely in time to cover them in our reports. Thankfully, our telegram channel makes good job now, so, I could just post the links on some events and not re-print them here to save the space and your phyche
. Currently we're living in times when in fact there is no room for market-specific factors but everything is driving by macro economics. Thus, this report and probably tomorrow's Gold report we dedicate to it, with a bit more political issues in gold report.Today we consider US budget, recent data on US Real estate market and explain why we do not believe in fast rebound of EU and UK, why we have downside targets of 0.9 and 0.95 by EUR and GBP correspondingly.
The US
The first thing that looks very bright now is markets' uncertainty. Investors are totally frustrating, and do not understand where to run. Just take a look at the headlines:
U.S. yields slide from multi-year highs on hopes of Fed pivot. This one stands for yesterday. And this one is the same day but few hours earlier - Wall St loses ground on fears of prolonged Fed hawkishness. With this sentiment you could about everything but long term investing, and hardly any significant upside action is possible in this atmosphere. Concerning Fed pivot I would say like this:
Fed has pushed the rate up to 3.5% already with expectations of more rising, and possibly aggressive rising above 5%. WSJ tells that Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes. But what do we have? CPI/PPI numbers are not dropping. Yes, the pace if inflation rally has decreased, mostly it stands stable, but the rate hike circle is unprecedented, but no impact on inflation. About what Fed pivot we could talk in current conditions?
Let's go further. Treasury bonds are so oversold that for the last 47 years there is no historical context that we could compare to with what is happening now.
Federal Reserve and White House officials spent last week quizzing investors and economists about the risks of a British-style meltdown at home. The answer they got back, according to four people at separate institutions who were in such conversations and who spoke on the condition of anonymity to describe private meetings, was that it probably could — though a crash does not appear to be imminent. As the Biden administration did its own research into the potential for a meltdown, other market participants relayed the same message: The risk of a financial crisis has grown as central banks have sharply raised interest rates.
Officials at the Fed, Treasury and White House are among those trying to figure out whether the United States could experience its own market-shuddering meltdown, one that could prove costly for households while complicating America’s battle against rapid inflation.
Yet they also voiced reasons for concern: It is impossible to know what might break until something does. Markets are large and intertwined, and comprehensive data is hard to come by. Given how much central bank policy has shifted around the world in recent months, something could easily go wrong. A financial disaster could force the Fed to deviate from its plan to control the fastest inflation in four decades, which includes raising rates rapidly and allowing its bond portfolio to shrink. Officials have in the past bought large sums of Treasury bonds in order to restore stability to flailing markets — essentially the opposite of their policy today.
The Treasury Borrowing Advisory Committee, an advisory group of market participants, has been asked in its latest questionnaire about a possible Treasury program to buy back government debt.
The Bank of America warns that the US Treasury market is under threat of large-scale forced sales. The world's largest bond market. And who doubts? Just take a look at Japan, which has made strong JPY intervention yesterday. With the foreign reserves around $1.3 Trln, how do you think, where they take the USD to sell and support the yen? Right, they sell them, they sell US Treasuries from their reserves. And soon all other central banks start to do the same, because currently nobody could hold the competition with Fed reserve is rates rally. SnB has started to sell FANG shares (Facebook, Amazon, Netflix, Google), we've talked about it last week. It means that situation stands really thin as foreign investors is starting to sell US assets to finance own deficits, especially when it comes from SnB that was seemed to be most stable among other European central banks. So, the USD deficit stands everywhere now.
The Treasury in the UK is transferring BILLIONS to the Bank of England to cover losses from quantitative easing, and people are only joking about the prime minister who lasted 45 days? The global game of creating a screen, the central bank's cartel pyramid in action... Understand the level of manipulation and how close the whole system is to being torn to shreds.
So, Bank of Japan starting emergent bond buying and currency interventions, BoE just was holding bond-buying to avoid collapse, Fed is calling to the prof. to consider UK scenario - should we could keep the image that everything is OK and nothing is going on? Meantime, 10-year US yield hits 4.25% while 2-year rate is coming to 5% and all this stuff in the US currency zone, not in Zimbabwe or Bangladesh!!!
Meantime, mortage rates are becoming toxic for the economy. Here is, in Russia, joke starts that domestic official mortage rate is lower than in the US. 7% is a highest level since 2022 and 127% YoY jump is a fastest ever rate change.
Real estate includes construction services, materials costs, real estate agencies, financial intermediaries, transport, utilities, energy and social infrastructure, costs for furniture, household and digital appliances, home improvement, and so on. About 30% of the US economy directly or indirectly serves this segment. It was real estate that acted as a trigger and catalyst for the crisis processes of 2007-2009.
The value of real estate to disposable income is growing rapidly, reaching an unprecedented historical scale of 253% compared to 275% at the peak of the mortgage bubble in 2006. The relatively safe level is 180-200%, i.e. the property is overvalued by 30%. The collapse of the bubble is inevitable, which will be accelerated on the trajectory of rising mortgage rates.
Housing starts dropped 8.1% to a seasonally adjusted annual rate of 1.439 million units last month. Data for August was revised down to a rate of 1.566 million units from the previously reported 1.575 million units. Existed homes sales are falling 8 months in a row:
Demand has already collapsed by almost 30% and will continue to decline until prices normalize. This will be reflected in 30% of the American economy, which is directly or indirectly tied to real estate. But the banks also have problems ahead – the growth of delays and write-offs is just beginning. Here is overall performance of Real Estate US market Index. Worst performance in 10 years, excluding Covid collapse.
The real estate market in the US is another construction with high detonation potential with all the ensuing destructive consequences. At the moment , the mortgage lending market in the United States is valued at $ 12.7 trillion – an increase of $ 2 trillion since January 2020 . This is almost comparable to the pace of the mortgage bubble of 2005-2008 (2.5 trillion growth over a comparable period).
All this happened on a background of a record–breaking increase in real estate prices in history - about 40% increase in value in two years. High demand, backed by record prices, has made this market overheat. Sales on the secondary market were 6.6-6.8 million homes at the peak of the hype in 2021, which is close to the historical maximum of 7.1 million recorded in 2007. Now sales on the secondary market have collapsed by 30% (!) to 10-year lows (chart above), corresponding to a paralyzed market in the conditions of lockdowns in March-May 2020.
The amount of construction decreased by 20%, reaching the level of 2015-2016. Taking into account the cost of real estate and the volume of current income, the cost of mortgage loan expenses has more than doubled since 2020, and the burden on income corresponds to the historical maximum. As a result, the index of mortgage applications from the MBA collapsed two times, breaking through the lows of 2013, when the market was most depressed. The index of refinancing of new loans has practically zeroed out, reaching lows in 20 years.
Meantime, Foreign bank units have been accumulating cash reserves at the Federal Reserve, likely reflecting concerns that a dollar funding crunch could be looming as the U.S. central bank reduces its balance sheet and global economies face recession risks. Inflows to FBOs from their parent banks, has also grown, Fed data showed. As of Oct. 5, "Net due to related foreign offices" was $650.5 billion, up 14%
The decline in Fed reserves has been more rapid than what some had anticipated. As of Oct. 5, bank reserves at the Fed fell under $3 trillion to $2.972 trillion, down roughly $1.3 trillion from a peak of $4.3 trillion in December 2021. In the Fed's previous QT cycle, $1.3 trillion in liquidity was withdrawn in five years, analysts said.
Analysts said foreign banks' increased appetite for dollar liquidity could also be a function of the 3.15% paid by the Fed for those assets, or the so-called interest on reserve balances (IORB).
Now its time to take a look at US Budget report. First is, it was a delay for 10 days in release. As with companies earnings reports, delay is promised nothing good. And this has happened. Usually September is a proficit month. But not this time. The budget deficit has jumped for 430 Bln just in September! Helicopter money are launched again and in unbelievable scale. Just to compare it to "just" 125 Bln in 2020 Covid year, where stimulus was on top.
The third quarter was terrible for the budget. With a large handicap, to the anti-record of 2021, with a deficit of 537 billion. This time they showed a deficit of 861 billion – this is an outstanding level of deficit, comparing with previous periods.
The US was tring to "live within their means" until mid-summer, but it didn't work out. After the financial markets have begun to fall, they have decided to return to the previous paradigm – printing. Thus annual deficit was decreasing in March - July 2022, when it reached a low point of 962 billion and rose sharply to almost 1.4 trillion by September. Revenues dropped to 7% YoY (from 33-35%) while expenses has grown by 26%. That's why there is such a shortage.
The reason for the madness this time is overspending through the Ministry of Education on student loan subsidies of $ 400 billion under the Biden programme, where about 22 million borrowers can receive a deduction of $10 - 20K, depending on conditions and income. So, that Court has to block it for investigation.
It seems that more performance with expenses should be. The question is where to get the money?
Other issues to consider - EU, UK, Japan
The European Central Bank will go for another jumbo 75 basis point increase to its deposit and refinancing rates when it meets on Oct. 27 as it tries to contain inflation running at five times its target, a Reuters poll found. In the run-up to winter, forecasters are expecting the ECB to be more aggressive in tightening policy. By year-end the deposit and refinancing rates were forecast to be at 2.00% and 2.50% respectively compared to 1.25% and 2.00% predicted in a September poll.
The ECB targets inflation at 2.0%, yet it was 10.0% last month. It will average at a peak of 9.6% this quarter, higher than thought last month, before gradually drifting down but will not reach target until late 2024, the poll found.
The ECB has promised more hikes and begun a debate about unwinding its 3.3 trillion euros ($3.25 trillion) of bond purchases - the legacy of its fight against deflation in the last decade.
The Bank of England said it would start selling some of its huge stock of British government bonds from Nov. 1 but would not sell this year any longer-duration gilts that have been in the eye of a recent storm in the British government bond market. The central bank wants to reduce its 838 billion pounds ($948 billion) of government bonds acquired over more than a decade of crisis-fighting, from the global financial crisis to the coronavirus pandemic and its aftermath.
The BoE said sales in 2022 would be in short- and medium-maturity sectors, not bonds of more than 20 years. They suffered the biggest sell-offs in the recent market upheaval caused by the government's now-abandoned tax-cutting mini-budget. Analysts at consultancy Evercore said the plan looked "punchy" given the still volatile market conditions.
Barclays - The Federal Reserve may have to slow or stop shrinking its nearly $9 trillion balance sheet sooner than many now expect
The Barclays report said that due to changes in the financial system, total reserve levels are likely to come under pressure at higher levels, which means "the current level of bank reserves is probably closer to reserve scarcity than might have been the case before 2015."
The path the Fed is on right now will likely shave off just over $1 trillion from its balance sheet next year, which means reserves will become an issue for monetary policy before the end of the year, the report said.
Totally agree. We've talked about this that Fed has only two options and both are bad - either start printing money again or to ruin global and US economy with rate tightening and QT.
BNP Paribas expects the Federal Reserve to push the fed funds rate to a peak of 5.25% in the first quarter next year, higher than market expectations and a level that could tip the world's largest economy into recession, the bank said in a research note on Wednesday. The French bank is forecasting the U.S. economy to go into recession in the second quarter of 2023.
The chances that Japan will become the one who will crush everything are rising. Japan's inflation hits 8-year high in test of BOJ's dovish policy, BoJ keeps unprecedented QE policy, paying no attention to Yen collapse, which forces Ministry of Finance to make urgent bond market support. At the same time - they have no intention to stop. The Bank of Japan meets on Oct. 28 and is expected to continue running against the grain of global central banks by sticking to its extraordinary levels of stimulus - even as its policy exacerbates a politically unpopular plunge in the yen to a 32-year low beyond 150 per dollar. And they tell that do not see any immediate damage to the country’s banking sector from the central bank’s negative interest rate policy. Amazing...
EU will keep losing in this game
First is, Europe is paying an incredible price for the energy crisis. The trade deficit of the EU countries has reached a historical anti–record of 58 billion euros in August. Trade deficit amounted to 304 billion euros in the 8 months of 2022 against a surplus of 98 billion in 2021. So, taking in consideration the tendency, we could get around 500 Bln deficit by the end of the year. How much does the energy crisis cost to Europe? In the assessment of the trade balance, we are talking about 700-800 billion euros per year. The scale of de-industrialization is yet to be calculated – these processes become evident with a delay, but given the experience of the 70s, at least 10-15% of the industry will be cut off.
Europe may partially lose the competitiveness of industry through uncontrolled growth of energy costs. This is affected by both the record rate of weakening of the euro against the dollar (over 25% since May 2021 and over 15% in 2022), and the unprecedented growth rate of raw material prices: average gas prices increased almost 4 times from January to September 2022, coal prices increased 2.7 times, and oil almost 55%. In the structure of expenses, the main problem (by about three-quarters) is gas.
The main medium-term beneficiaries of the energy crisis in Europe are the United States and China. Europe position in this crisis keep going weaker, and if earlier Europe was the main distributor of capital on global markets in the face of a record current account surplus, now on the contrary, Europe will need foreign investment to close financial gaps. But there will be no investments in Europe, because all the excess cash flows that the subjects of the world economy are able to generate are absorbed by the United States, covering their own deficits.
In this sense, the task of the United States is to prevent the consolidation of Europe and the crystallization of a single viable decision-making center and the exclusion of strategic integration with Russia or China. It is critically important for the United States that Europe is a key trading partner, supplier of capital and technology, but at the same time does not create competition in strategic issues that are of primary importance to the United States.
Fragmentation and contradictions in Europe allow the United States to maintain leadership in the battle for capital and technology, covering its own exorbitant deficits, while having significantly greater imbalances and problems than anywhere else. Therefore, the United States will do everything possible so that Europe cannot consolidate and show subjectivity in choosing its own economic and political interests.
All other things being equal, in relative comparison the United States is again the best. the United States do the best – create controlled chaos and set vectors of "competitive diversity" in a complex, dynamic system. It's bad for everyone, but the USA is a little better than the rest. They have no choice, otherwise there is nothing to cover the record trade and budget deficits.
Conclusion:
Despite the difficulties that EU, US and UK have - they intend to keep tightening policy. While Fed is already there and has no intention to stop, UK should join the party on 1st of November and follow the Fed with rate rising on 3rd of November. EU also stands on the way of rate change. Very aggressive comments from the Fed members last week scare investors by their commitment to struggle inflation at any cost. We could see it by 2-year rate around 5% already. While US job market is relatively strong and inflation is not falling, Fed remains hawkish.
Meantime the structural crisis is spinning up. Attempts are being made to compensate for the problems, first of all, for households (Germany just recently allocated another 200 billion euros for this), but trillions are needed to compensate for structural problems, which it is unclear where to get and, most importantly, which will still increase inflation. Take a look at EU total debt chart and compare it to GDP growth.
If you wish you could calculate the growth rate of debt themselves and compare it with the growth rate of the economy over the same period. We remind you that if GDP growth is achieved due to a similar scale (in absolute numbers) debt growth, then this is not exactly the growth. Accountants have learned to transfer the numbers of the increase in debt to GDP growth for a long time, and if these indicators are not placed side by side in reports, then no one will notice anything. The trouble is that any businessman knows the real price of such growth.
You could see the same stuff on the US stock market. Recent growth was paid at 70%+ by shares corporate buybacks. Companies were taking loans for near zero rates and buy own stocks, pushing its price higher, increasing the capitalization and getting not bad profit. But when market turns - what do you gonna do with huge accumulated debt on the balance and stocks devaluation?
It is another reason to be worry. If monetary and economic authorities of almost all countries of the world are guided by similar principles today, it becomes a little uncomfortable...
To be continued...
