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Tag Archives: interest rates

The buzz in the media has started.  Some are saying that the FOMC event is fully priced in the marketplace and others are saying that high volatility is expected in this impending event.

Bernanke was interviewed last night and he was quoted saying that the Federal Reserve needs to entertain ‘negative interest rates’.

90% of all economists interviewed by Bloomberg and 95% of Wall Street all believe that Janet Yellen will pull the trigger at 3am Singapore time and 3pm NY time.

Will Janet pull out a surprise from her hat and not raise interest rates?!  She has every reason to raise interest rates and also every reason not to raise interest rates.

Wall Street is debating whether she is a traditional economist that needs empirical data to line up like the stars before she tightens monetary policy of will she act more from her ‘gut feel’ of where the economy is going.

The world today is different, inflation in many developed countries is almost non existent, way way below the 1% or low 1%.  We will not see 2% for a long time, simply because there is a real threat that the developed countries may go into a deflationary phase.  Oil below $40/- per barrel with fears that it will go to $20/- is unfounded.  The world was buzzing with strong economic growth in the late 90s and oil was at $20/- per barrel.  Demand will always be there no matter how much OPEC pumps out of the ground or Big Texas Oil.  The world has a fascination for the internal combustion engine for fast cars ,luxury cars and basic transportation.  Be it recession or not, people will fill up their petrol or diesel tanks and drive their vehicles proudly.

So why does a falling oil price be of such a concern?  Well, why did oil go up to $140/- per barrel in the first place?  I believe it was speculation, I believe it was more and more producers getting into the game and with high capex, they needed to sell it at the elevated prices, I believe it was oil sands or shale oil.  The cost of extracting oil went from $12/- per barrel to an average of $68/- per barrel.  Should Big Oil profiteer from the general public?

Real estate prices has been escalating in all developed countries from the UK to the US to Australia and Europe.  Every developed country is excluding food and real estate from the CPI basket, however, if you were to include real estate into the basket, then, we will not be looking at the current 1% inflation rate but something in the region of 10%.

So are we playing around with numbers?  Isn’t real estate or more appropriately, dwelling homes an important component to be included in the CPI basket as it affects the wallet of all consumers as in the ability to pay their mortgage payments and the fact that it is a long term financial commitment.

If we look at the EURUSD and the GBPUSD hourly charts with Fibonacci overlayed, it appears that the EUR is trading at its near high and GBP at its near bottom.

gbpusd_hourly

eurusd_hourly_fibo

If volatility is going to happen at the FOMC, will the two european currencies swing in opposite direction?

There so many permutations: –

Raise rates + dovish press conference

Raise rates + strong press conference

Rates stay put + dovish press conference

Rates stay put + strong press conference

In all 4 permutations, it can be argued for both a case of strong USD and a case for weak USD, why?  It is because the US is in a precarious economic position.  The truth is that the economy is not growing strong enough, moderate growth with some fragility, yes!

As time draws nearer, I am sure we will see more noise in the media.

It’s interesting the whole world was focusing on Janet Yellen’s speech and responses at the Senate Banking Committee on Tuesday and Wednesday.

All the major banks have concluded together with the media that the word, ‘patience’, will be dropped in March and any rate hike if any will happen in June.  Two dates momentarily cast in stone for now.

In my view, jobs creation, employment and unemployment are more important data compared to inflation for Janet Yellen.  Though, recent CPI data suggests low inflation and that the revised 1.7% target rate may not even be hit is a lesser concern, then non farm payrolls and unemployment.

If I study the history of the past Fed chairmans including Greenspan and Bernanke, they usually get ahead of the curve and market expectations.  They don’t like to be dictated by the media.

In the same tone, I believe Yellen will not subject herself to the pressures of the media, which is why her responses to Congress was non committal.

I believe she will pre-empt the markets and raise interest rates earlier than June.

I believe she will surprise the markets by raising rates in May.  As long as non farm payrolls stay above the average of 200,000 and higher, it will give her the confidence to make the decision.

A strong US dollar is not necessarily a bad thing for the United States.  Let’s not forget that the U.S., is a domestic economy and it only exports barely 6% of its GDP.

Therefore, ensuring that employment stays strong and wages bouyant will give Yellen the confidence to raise rates.  High employment and good wages means American can better support consumption which is a main driver of the economy.

I believe inflation is on the rise in the U.S., although it doesnt seem to be manifesting in the data.  Real estate prices are at all time highs and so is the financial markets thanks to cheap liquidity.  However, can it be said that the fundamentals are supporting the real estate market  and financial market?

Let’s see.