Powell lost.

The main news. The US Federal Reserve has cut the rate by 0.25% to 4.00-4.25%; two more cuts (0.25% each) are expected by the end of the year. It can be noted that the vote was almost unanimous, even Cook voted for a 0.25% rate cut. The only exception was newly appointed board member Miran by Trump, who voted for a larger percentage reduction and wants to bring it to 2.75%-3.00% this year.

In reality, the intrigue turned out to be quite complicated, and in the final section of the Review we will tell you about it. But the main conclusion from the decline is obvious: even for the most naive and stubborn supporters of the “independence” of central banks (which was understood precisely as independence from state power, but not from elite bankers), it became clear that the state was taking monetary and emission policy under its wing.

Of course, the process will be quite slow and even with some rollbacks, but it will definitely end quite quickly. And you need to understand that it was this week that a fundamental revolution in financial ideology took place.

Macroeconomics. The Chinese data for August was definitely disappointing.

Fixed asset investment slowed to a record low (minus covid) of +0.5% per year; the collapse in the real estate sector is intensifying (-12.9% per year):

The amount of investments itself (32.6 billion yuan in January-August) the worst in 11 years:

Foreign direct investment is also falling, albeit with a slowdown (-12.7% in January-August):

Industrial production weakened to an annual low of +5.2% per year; only extractive industries accelerate growth:

Annual increase in retail sales on a 9-month day (+3.7%) :

Unemployment increased slightly (5.3%):

The decline in prices of new buildings slowed to a one-and-a-half-year low (-2.5% per year). But this is still the 26th negative in a row, and the monthly dynamics remains consistently negative (by -0.3% for 3 months in a row):

In general, as we expected in recent months, the Chinese economy is in trouble.

Fitch has downgraded France’s rating – now it’s in the lower half of the investment spectrum (it’s still far from junk status, but it’s already halfway there).

New Zealand’s GDP -0.9% per quarter; goods production is particularly poor (-3.5%):

And -0.6% per year, the 5th negative in a row:

Producer and importer prices in Switzerland -1.8% per year, the 28th negative in a row and the worst dynamics in 1.5 years:

PPI (Industrial Inflation Index) Germany -0.5% per month, the 8th minus in the last 9 months:

And -2.2% per year, at least for 1.5 years and a repeat of the worst dynamics of the covid era:

Classic depressive deflation.

The unemployment rate in Britain has been at its peak for the 3rd month in a row since January 2017 (omitting covid):

In the Netherlands, the peak has been since February 2018 (also minus the covid outbreak):

The index of leading indicators in the USA is -0.5% per month, its value is the lowest in 11 years:

The number of mortgage applications in the United States soared by 30% per week:

To a peak from April 2022:

Moreover, the demand for refinancing jumped by 60% at once, to a maximum since January 2022; moreover, the average loan size turned out to be a record high:

It seems that the public has massively decided to speculate on the real estate loan market amid rising inflation expectations. If prices rise significantly, the rate cut will not last long, so
we must hurry to grab the cheaper loans right here and now. It’s a very dangerous game.

Its danger is confirmed by the realities of the market – the number of new buildings is 8.5% per month and is close to the 5-year bottom:

And building permits (a leading indicator!) have already been minimal for 5 years, and excluding covid – for 6:

The US Housing market Index (from the Association of Home Builders) is near a 13-year bottom:

And its single-family home sales component has already reached it (i.e. it is below covid levels):

The massive fascination with collateral financial instruments against the background of a falling market is about the same as it was in the United States in 2007/08 (although the scale of psychosis is, of course, noticeably smaller now). But the stock market bubble is higher.

The Bank of Japan kept the rate at the same level of 0.50% (repeating the peak of 2007/08), and 2 out of 9 board members have already voted to raise it by 0.25% (which will send the percentage to the peaks since
1995). The Central Bank will start selling assets from its balance sheet (exchange-traded funds ETFs and real estate investment trusts):

In response, the yield on 10-year government bonds updated a 17-year high.:

The Bank of England has not changed the key percentage, but will reduce sales of government bonds from its balance sheet. The Central Bank of South Africa is also unchanged.

The Central Bank of Brazil did not change anything in its monetary policy, leaving rates at a 19-year high of 15%.

The Central Bank of Indonesia unexpectedly cut the rate by 0.25% to 4.75%, despite the acceleration of economic growth. The Central Bank of Canada did the same (-0.25% to 2.50%), but there are no surprises. The situation is similar for the Central Bank of Norway (-0.25% to 4.00%).

The main conclusions. We have repeatedly written about the conflict between Trump and Powell. In fact, it ended with Trump’s victory (although there are questions here, see below), which is clearly evident from Powell’s press conference following the meeting.

«▪️The unemployment rate remains low, although it has increased slightly.
▪️The pace of job growth has slowed, and the risks of a decline in employment have increased.
▪️Inflation has recently increased and remains at a fairly high level.
▪️The moderation in GDP growth largely reflects a slowdown in consumer spending.
▪️Job growth has slowed significantly due to a decrease in the number of immigrants and low activity of the population.
▪️The demand for labor has weakened.
▪️Inflation has decreased from its peak in mid-2022, but remains at a slightly elevated level.
▪️Product inflation has increased, and disinflation in the service sector continues.
▪️The overall effect of tariffs on inflation remains to be seen.
▪️In the baseline scenario, the impact of tariffs on inflation will be short-lived.
▪️We are well prepared to respond to economic changes in a timely manner.
▪️The balance of risks has shifted towards negative consequences for the labor market.
▪️The Fed’s PREP does not follow a set course, it all depends on the macro data.
▪️The increase in commodity prices accounts for most of the increase in inflation this year.
▪️I expect tariff-related price increases to continue this year and next.
▪️The changes in the labor market are mainly related to changes in immigration policy.
▪️I can no longer say that the labor market is stable.
▪️The change in the balance of risks indicates the need to move towards a neutral monetary policy.
▪️There was no broad support for a 50bp rate cut today
▪️I do not feel the need to act quickly on the interest rate.
▪️Today’s reduction can be considered as a risk management tool.
▪️The risk picture for the labor market has changed a lot since the last Fed meeting.
▪️The risk of inflation growth is lower than in April.
▪️Not everything that happens in the labor market is related to immigration. There is a clear slowdown in demand for labor.
▪️The probability of a prolonged increase in inflation has decreased.
▪️We need to reassess the risks of the Fed’s dual mandate of labor market inflation.
▪️The unemployment rate may rise sharply due to the low rate of hiring. This is one of the reasons why we consider it appropriate to shift the policy focus towards a more balanced approach.
▪️We are in a situation where decisions are made from meeting to meeting.
▪️Of the 19 Fed chairs, 10 expect at least two rate cuts before the end of the year, while the remaining 9 expect fewer.
▪️Look at the Fed’s forecasts through the prism of probabilities.
▪️The annual revision of the employment data almost completely coincided with our expectations.
▪️I don’t think we’ll get to the point where the Fed will make decisions based on political considerations.
▪️It is inappropriate to comment on the lawsuit with Cook.
▪️The Bureau of Labor Statistics is making every effort to eliminate the factors that led to the revision of jobs.
▪️The BLS data remains reliable enough for the Fed to operate.
▪️The labor market is weakening, we need to avoid further cooling.
▪️I’m not sure that today’s 25bps rate cut is of great importance.
▪️AI technologies may be part of the reason for the slowdown in hiring.
▪️Recent macro data indicate a significant risk of a cooling of the labor market.
▪️For the record, this does not mean that the economic situation in the United States is bad, but political decisions remain difficult. From the point of view of politics, it is difficult to understand what to do.
▪️Almost all Fed members supported today’s rate cut.
▪️The rapid decline in both supply and demand for labor has attracted widespread attention.
▪️The break-even rate of employment growth has clearly decreased.
▪️It is good to see that both economic activity and consumer demand are continuing.
▪️As the key interest rate decreases, as a rule, the mortgage rate decreases.
▪️A significant change in the Fed rate is needed for this to affect the housing market.
▪️The Fed’s reserves are still in excess. We are reducing the balance size quite slightly by QT.
▪️We are approaching the optimal level of reserves and are closely monitoring the situation.
▪️The default rate is gradually increasing, and we are monitoring this issue. The households are still in good condition.”

Please note that Powell always refers to inflation and explains that it is higher than normal. We have repeatedly written that from the point of view of formal data, the rate now needs to be raised, not lowered. But political expediency outweighed it.

At the same time, we note one more circumstance. Powell had to cite some circumstance that made him prioritize the labor market over inflation data. This was the revision of the data on the number of unemployed, which we recognized in the previous review as the main news of the week. We are glad that our opinion coincided with Powell’s.

But, we note that the problem of the internal contradiction of the Fed’s decision has not gone away, and, of course, we will soon see how it manifests itself in life.

In addition to the second part of the Review, the number of mortgage support requests can be noted, which reached the peaks that were the previous time during the crisis of 2007-08.

We really hope that our readers will not be affected by this problem, so we wish them a pleasant weekend and a fruitful working week!