Ivan Compan
The past week was not rich in outstanding events, but the small ones that occurred only strengthen the belief that the “Higher for Longer” scenario is still the main one when analyzing possible future actions of the Fed.
So far, the data coming from the macroeconomic front indicates that the final victory over inflation has not yet been achieved. Although significant progress has been made, the American economy does not want to cool down, which on the one hand is good, but on the other hand, it threatens a new rise in prices in the near future. That is why investors and economists do not believe that the Fed will “turn on the back foot” and begin lowering the interest rate in the near future. Most likely, the rate will remain at the current high levels – “Higher”, for a long time – “for Longer”.
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Should we expect raises before the end of the year? The likelihood that the Fed will raise rates another 25 bps this year is now 40.2%, up significantly from 30.8% last week and 24.9% a month ago. And this is natural, because, as statistics demonstrated this week, consumer confidence is not falling, the services sector is expected to grow over the next six months, and the labor market is still in the same heated state.
The Fed’s GDP Now model, as of September 6, projects US GDP to grow 5.6% in the third quarter, which is hardly a recession. But, nevertheless, the main scenario for now remains one in which the rate will remain at the current level. Its probability is 55%. A Chicago Fed paper published this week argues that the effects of previous rate hikes have already spread throughout the economic system and that the Fed’s moves are enough to bring inflation back to its target level of 2% as early as 2024. We’ll see how it really turns out. Because there are many variables in this equation and not all of them are under the control of the US Federal Reserve.
Oil continues to rise, adding to investors’ inflation worries. Since July, the price of Brent has increased by more than 25% and has already exceeded $90 per barrel, which, in fact, is not surprising, because Saudi Arabia warned earlier that it would do everything in its power to keep the price high. They have not yet broken their promise and have again decided to reduce production by another million barrels per day. Last year, before the American elections, when a similar situation arose, salvation came from the White House, which decided to sell off US strategic reserves. This year, when they were not significantly replenished last year, after the previous devastation, and are at a low level, such a trick will no longer be possible. And it’s not necessary, because there are no elections anymore. So the story with oil may be the same as with the bet – “Higher for Longer”.
Not very encouraging news comes from China, which continues to build its new “Great Economic Wall”. China’s central bank is actively buying gold, selling US government debt and fighting to de-dollarize foreign trade. But this is unlikely to help China maintain economic growth. Problems are growing, the real estate market is frantic, the ripples are spreading to other sectors, particularly the financial sector, and the index of activity in the services sector, released this week, has fallen to an eight-year low. Unfortunately, China’s economic problems will not be contained within the country, no matter how high the wall the Chinese communists build – if the situation does not change for the better, it will fall on the whole world.
One of the bricks in China’s Great Economic Wall was the ban on the use of iPhones by government employees. Moreover, the authorities are thinking of extending this ban to employees of state-owned companies and government-related organizations. Of course, this is bad news for Apple, whose share price fell more than 6% in a week. Moreover, it pulled the Nasdaq index with it, which is not surprising, because for many technology companies, China is one of the most important markets, directly or indirectly (as, for example, for Qualcomm), which is a major supplier of chips to Apple. Now China is left to ban its officials from driving Teslas, washing Ariels, and drinking Coca-Cola, which would be a devastating blow to corporate America.
Russia once tried to do something similar, building a “Russian economic fortress,” but you yourself know what came of it. We believe that the Chinese version of communism still differs from the Russian one for the better, pro-Western, because isolating China and stopping its economy will definitely cause huge problems for the United States, Europe, and the whole world. And to you and me.
2023-09-09 09:46:00
#endure #harder #longer
