Posts Tagged ‘ Inflation ’

2017

February 1, 2017
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2017

2016 started in a tailspin with spiraling China meltdown fears. Those fears proved to be ill-timed, and against most prognostications, despite BREXIT, the start of Fed rate hikes, and the looniest election anyone can remember with a shocker outcome, the market went on to have a gangbuster 2016, producing a total return of 12%. The Trump rally surprised most, and despite highly unpredictable tweeting habits, and inflammatory comments, the markets took to the perception of the return of a business friendly administration. 2017 started with complacency, and the Trump driven market getting “the benefit of the doubt”. Interest rates are modestly higher, though this isn’t thought to be problematic because stimulus is proposed to support US GDP growth. Jobs are being talked/threatened back into the US. The financials exploded...

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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

September 1, 2015
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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

This weekend’s Jackson Hole speeches, and subsequent commentary, outlined the guideposts for a Fed rate hike, potentially in September. The explosion in crude, if it holds for two more weeks, will pressure the Fed to hike. The Fed clearly highlighted the USD, employment, and oil, as drivers of inflation. The fast 10-point in rally in oil, from sub-$40, to near-$50, unwinds 2-months worth of decline. With the Fed keying off energy price declines as “temporary”, the failure to hike, in the face of the above mentioned factors swinging more inflationary, risks a credibility issue. With stronger crude (again if it holds), the August Employment Report looms very large, and will likely be the final determinant of a September rate-hike, aside from a potential market crash. On the topic of market crashes… funny...

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Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

August 29, 2015
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Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

Stanley Fischer delivered a critical speech this weekend at the Jackson Hole, Economic Symposium, outlining the Fed’s forward looking view on inflation and the potential for a lessening of factors that dampen inflation. This speech signals the Fed is staying the course and determined for rate hike lift-off on the advertised time-table. CJF interprets this speech hakwishly, relative to market expectations for a push-out to the December lift off timeframe. It is likely that December is the latest possible preference for lift-off with September (or October) still very much on the table. Will be interesting to see how volatile markets react to some of the forceful language in the speech. The speech, in full, is a worthwhile read. Excerpts with CJF commentary: The past year’s energy price declines ought...

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The widow maker trade spreads from Japan to the US

May 19, 2014
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The widow maker trade spreads from Japan to the US

Since 1990, one trade that has always lost money, over any reasonable time period, has been the shorting of JGBs (Japanese 10-year). This trade, unique in its consistency, developed its own name; “the widow maker”. With JGBs yielding 57 bps today, the widow maker is alive and kicking. Over the past 24-year time period, JGB yields peaked around 8% in 1990, and trended steadily lower since. Within the US bond market, through the second half of 2013, into 2014, consensus developed on the inevitability of a sell-off, and potentially severe one. A one-sided consensus view is always dangerous in any market, creating heightened risks as new information is gleaned. The recent bout of inconsistent economic data, and degree to which active market participants were on the same side of...

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Alcoa (AA); well positioned and stock worth revisiting

April 7, 2014
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Alcoa (AA); well positioned and stock worth revisiting

Alcoa (AA) just hasn’t received respect over the past several years. This is in the process of changing today, and AA has the potential to continue its rally to the low $20s from $12-$13. AA morphed into a classic out-of –favor stock since the financial crisis but lackluster stock performance created value amidst horrible sentiment. The stock moved sharply over the past 6-months, rising from $8 (where it traded give or take for 5-years) to $12. Alcoa reached $40 pre-financial crisis and the shares were never permanently impaired by a meaningful amount of distressed equity issuance – one crude measure to demonstrate upside. Pre-crisis, times were different, with a more consistent appetite for commodity exposures in an environment of rising commodity prices. Contrast to recent developments: Commodity exposures have...

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Deja Déjà Vu – A Third Summer of European Crisis

May 18, 2012
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Deja Déjà Vu – A Third Summer of European Crisis

Over the past week, it has become clear that a third annual conflagration throughout Europe is upon us. The crisis has morphed yet again, and like The Hydra, it has come back in a more menacing form. The issue this summer is more profound than the “sovereign debt crisis” which struck last summer. Last summer’s issues were always containable with simple resolve from the ECB. The market forced the issue in sudden manner and eventually a fix came in the form of 3-year long-term refinancing operations (LTRO). Astute observers will notice that today, sovereign debt rates, while higher, have not flared up to the levels they reached last year. European interest rates should not approach summer levels because there is a set playbook that works to contain sovereign rates...

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First the Japanese Yen and then Gold – There is No Safe Haven Currency Panacea

March 1, 2012
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First the Japanese Yen and then Gold – There is No Safe Haven Currency Panacea

Beware of the one-way, one-speed runaway train! Usually in the normal chain of events the train stops, lets the passengers off, turns around, and starts going the other way. In a rare circumstance, all hell breaks loose and the train can’t be turned around and runs off the track and over the cliff. In the investment world it is rare to find this type of “accelerating in your favor (or against you)” investment theme. Two recent moves highlight how risks can be largest in the most comfortable havens. In less than a month, the seemingly invincible Yen has sold off from 76 to 81 (the USD dollar now buys 5 more) which is a 6.6% move, and a very large one-month move for the currency market. Not to be...

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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

January 12, 2012
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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

December inflation data was released this morning in France and Germany. In both countries, the inflation rate was higher than expected and failed to come down relative to prior months. EU harmonized German inflation was reported at 2.3% and EU harmonized French inflation was 2.7%. Two large economies yet to report inflation data are Spain (to be released on Jan 13th) and Italy (to be released on Jan 16th). The stickiness of inflation shouldn’t be a complete surprise because part of the higher inflation in Europe is structural based on labor market and corporate sector rigidities. The process of implementing the structural reforms which have been described as essential will take a long period of time. The positive flow through to inflation dynamics could take years. Despite inflation remaining...

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Negative German Yields – Implications for Risk Averse Financial Markets

January 10, 2012
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Negative German Yields – Implications for Risk Averse Financial Markets

On Monday, Germany gained entrance to a rarified club of sovereign nations paid to borrow money. This US accomplished this feat during the depths of the financial crisis. Now Germany is able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a number of items which will have implications for financial markets...

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Investing Ahead of a European Recession

December 14, 2011
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Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

November 17, 2011
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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

I’ve been writing about the impossibility of the ECB running appropriate monetary policy for 17 different nations. The dilemma couldn’t be more evident when contrasting the economy of Spain with the economy of Germany. Spain actually has less sovereign debt relative to GDP than does Germany. The problem for Spain isn’t the level of debt the country has incurred, but the depth of the current recession and the questionable capitalization of the Spanish banking system. Spanish inflation is running in a range of 1.7%-3.0% depending on how you define it (1.7% core inflation). This morning, bond auctions in Spain only attracted investors at much higher yields, approaching 7%. As a result of higher interest rates and a deepening recession (which is helping to reduce inflation), real interest rates in...

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Europe Must Decide Its Future – Self Induced Financial Crisis Has Led Europe to the Brink

November 10, 2011
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Europe Must Decide Its Future – Self Induced Financial Crisis Has Led Europe to the Brink

After Wednesday’s market action around the world, it’s a good time for a big picture assessment on the state of the financial markets. The attitude out of Europe has pendulated between nonchalance and vitriolic attacks among the EU-17. Italian sovereign rates spiraling above 7% have brought the eleventh hour upon the region. Escalation of the crisis has caused all types of forward looking investment to become somewhat of a farce. The environment of complete and utter policy uncertainty will no longer be withstood by markets as the full scale part of the European financial crisis enters its fifth month. After bungling the first few opportunities to implement a fix, it has become clear that dramatic action will be required to keep the Eurozone intact. The problems of the Eurozone’s...

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