Hope springs eternal

March16-22, 2024

Eternal memory for those who died in the terrorist attack at Crocus City Hall on March 22, 2024!

The US Federal Reserve did not dare to start cutting rates at a meeting held this week; it remained in the range of 5.25-5.5%. Taking into account the data on the state of affairs in the real sector of the economy (see previous review), it could be assumed that an impetus could be given to ease monetary policy. However, the sharp rise in the stock market most likely frightened Fed officials: a rate cut usually sharply supports stock assets, and the acceleration of the inflation of an already obvious bubble cannot please them.

The Fed’s cover letter contains the following points:

“Fed forecast for 2024 – Three rate cuts of 0.25 bp.

▪️The US economy is expanding at a steady pace.

▪️Inflation has decreased, but is still high.

▪️The goal is 2% inflation and maximum employment in the labor market.

▪️The Fed is closely monitoring inflation risks.

▪️Balance reduction (QT) continues. There are no changes.

▪️The Fed is ready to adjust monetary policy if economic risks arise.

▪️We closely monitor liquidity – we monitor money markets in order to stop reducing the balance sheet (selling Fed assets) IN TIME.

▪️We think it could further reduce the Fed’s balance sheet.

▪️It is important to monitor inflation data.

▪️We remember 2019. We take into account all the data in order to avoid major liquidity problems.

▪️Questions about CBDC have become very relevant in recent years, but the Fed does not have a secret laboratory to create such a currency.

▪️We are still very far from creating a CBDC. There is no active work in this direction.

▪️The Fed is not ready to offer anything to the US Congress on the creation of a CBDC.

▪️The Fed is closely monitoring “stress indicators” in the country’s banking segment.”

A description of Powell’s press conference is in the last section of the Review.

Macroeconomics. A lot of data has been released about the Chinese economy, which, as usual, turned out to be mixed.

Investments +4.2% per year, but in the manufacturing sector (-5.7%) and real estate (-9.4%):

China Fixed Asset Investment
Рис. 1

Foreign direct investment -19.9% per year, the worst dynamics in 15 years:

China Foreign Direct Investment YoY
Рис. 2

Industrial production +7.0% per year, 2-year high:

China Industrial Production
Рис. 3

Retail sales, on the contrary, slowed to a 5-month low:

China Retail Sales YoY
Рис. 4

And unemployment returned to its annual peak (5.3%):

China Unemployment Rate
Рис. 5

As always in China, it is very difficult to draw any conclusions based on official data. But our position is that China is teetering (like the United States) on the brink of a serious crisis, which regularly breaks out in certain sectors of the economy.

New Zealand GDP -0.1% quarterly, the 2nd negative in a row and the 4th in the last 5 quarters:

New Zealand GDP Growth Rate
Рис. 6

And -0.3% per year, also the 2nd minus in a row:

New Zealand GDP Annual Growth Rate
Рис. 7

Industrial production in Italy -3.4% per year, 12th minus in a row:

Italy Industrial Production
Рис. 8

Industrial production in Japan -6.7% per month; over the entire 70 years, the observation was worse only three times: in 2008/09, in 2011 (earthquake) and 2020 (covid):

Japan Industrial Production MoM
Рис. 9

The same story with production capacity utilization:

Japan Capacity Utilization
Рис. 10

Net engineering orders in Japan -10.9% per year:

Japan Machinery Orders
Рис. 11

11th minus in a row –

Japan Core Machinery Orders YoY
Рис. 12

PMI (expert index of industry health; its value below 50 means stagnation and decline) of the Australian industry (46.8), the worst in 4 years:

Australia Judo Bank Manufacturing PMI
Рис. 13

South African building permits -14.7% p.a. to 12-year low:

South Africa Building Plans Passed
Рис. 14

The Turkish Central Bank unexpectedly raised the rate by 5% to 50%, this is its maximum in 22 years:

Turkey Interest Rate
Рис. 15

The Bank of Japan was the last of the world’s leading central banks to raise the rate (for the first time in 17 years) by 0.1% to 0.0%; stopped monitoring the yield of 10-year government bonds and intends to complete purchases soon
corporate bonds.

The Central Bank of Australia also did not change anything, as did the Central Bank of China, the Central Bank of Indonesia, and the Bank of England, where the balance of votes shifted towards easing policy.

The Swiss Central Bank unexpectedly cut the rate (for the first time in 9 years) by 0.25% to 1.50%, the Brazilian Central Bank cut the rate by 0.50% to 10.75%, and the Mexican Central Bank lowered the rate by 0.25% to 11.00%.

Main conclusions. The main thing that Powell said at his press conference: “Jerome Powell Fed: The path forward is uncertain.” Otherwise, he actually repeated the previous theses:

“▪️Inflation has decreased significantly, progress in the economy.

▪️Risks become more balanced.

▪️US GDP is supported by high demand. demand and the “improvement” of supply chains.

▪️The Fed expects further improvement in the labor market.

▪️Inflation forecasts remain unchanged.

▪️Salary growth is weakening.

▪️Perhaps at some point we will reduce the rate this year, but the prospects are uncertain.

▪️The rate has probably reached its peak.

▪️Unexpected weakness in the labor market – we will respond immediately!

▪️We are ready to keep the rate high if required!

▪️We discussed with the chairs the SLOWdown of the Fed’s balance sheet contraction (QT)

▪️Our forecasts do not mean that we have come to terms with the current level of inflation.

▪️Demand for goods, I believe, will continue to strive for balance with supply.

▪️Bilateral risks in the US economy – current realities.

▪️Inflationary spikes in January and February are seasonal adjustments. Nothing terrible!

▪️There are no deadlines for reducing the rate of balance contraction (QT)… SOON. That’s all I can say.

▪️We want to avoid turbulence. This is the main reason for the slowdown in the balance sheet contraction (QT) rate.

▪️A significant weakening of the labor market is a reason to reduce the Fed rate.

▪️My intuition tells me that the Fed rate will not drop to the levels we have seen in past years.

▪️We need to see more data – we need confidence in a further reduction in inflation.

▪️No one knows whether the rates will be even higher in the long term.

▪️There remains a HIGH level of uncertainty around all this.

▪️Most believe that the Fed will lower the rate this year, but EVERYTHING will depend on the data.

▪️STRONG job growth is NOT a reason to worry about inflation.

▪️It is NORMAL if there is more stable inflation in the US in the 1st half of the year.

▪️Current financial conditions, of course, put pressure on the country’s economy.

▪If there is a lot of demand, but the supply does not lag behind, inflation will not rise.

▪We need more time to evaluate winter inflation data.

▪NO MORE crazy imbalances in the labor market.”

Note that our analysis suggests that inflation in the United States has been growing in recent months. Well, the state of the labor market does not indicate anything about improvement. In other words, Powell is inclined to pass off what is being done as real. However, we will know the exact picture in a month, when all the data for March is released.

If we talk about the general situation, we can note a number of circumstances. Firstly, interest payments to individuals are rising sharply against the backdrop of wages:

Рис. 16

Secondly, payments on government securities are growing sharply:

Рис. 17

Thirdly, a number of American economists (including such an iconic figure as L. Summers) published an article in which they gave an alternative analysis of inflation in the United States. If you believe these data, inflation is significantly (at least 4-5%) underestimated. Which suggests that since 2021 the United States has been experiencing a continuous economic decline.

Рис. 18

We will publish the details of this work in the next review. Actually, for our readers the information about underestimating inflation does not contain anything new. But from a political point of view, this is a very important fact, which suggests that the US elites are preparing an autopsy of information about the real state of affairs.

In the context of the monstrous terrorist attack in Moscow, we can only wish our readers to remain calm and exercise maximum caution.


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