If we recall the middle of 2009, one of the hottest debates among traders and economists was revolving around the subject of US economy experiencing inflationary or deflationary pressure. Many experts expected that, following the unprecedented central banks’ expansionary money supply policies, the G7 countries would witness a rapid increase in the level of prices. Exactly like the first half of 2009, the US CPI during the 1H10 has hovered near the flat line. Moreover, the all-item inflation numbers shifted into negative territory when oil went through a price correction. The annualized core inflation rate from December 2009 to May 2010 stands at only 0.3%, the tamest five-month annualized rate since early 1960s. If things remain status quo, is US in danger of turning into a Japanese non-inflationary experience? Continue reading ‘Back To Safe Heaven’
Tag Archive for 'Monetary Policy'
China took the entire world by surprise in the pre-crisis world economy, recording gigantic exports, consistently gigantic capital inflows, and imbalances in both stocks and real assets that could prove to be extremely harmful to the international economic stability in the short term and devastating to China in the long term. Some voices that called for restructuring were never heard in Beijing, simply because of the apparent success of high growth and low inflation economic dichotomy. However, China might have a very difficult time keeping inflation at its 2010 target of about 3 percent, after banks flooded the Chinese financial system with money in 2009. According to the median forecast of 14 economists, inflation may reach 4.4 percent this year. China’s GDP growth quickened to 10.7 percent in the fourth quarter, the fastest pace since 2007. The Chinese authorities affirmed a target of 8 percent growth for 2010, the same goal that the government has set and surpassed in each of the past five years. Nouriel Roubini said “this strong economic recovery implies that the super-loose monetary, fiscal and credit policy followed by China has to reverse itself or otherwise there is a risk of overheating and inflation”. Continue reading ‘China – The Wonderland’
A currency carry trade is defined as a leveraged cross-currency position built-upon an interest rate differential that is targeted to higher expected risk-reward transactions. The aforementioned trading strategy consists of borrowing low interest currency capital and investing in currencies with higher interest rates. Alternatively, the borrowed currency capital could be invested in various classes of assets with a superior perceived return. Normally, carry trades would be limited opportunities, as long as the markets react efficiently and quickly close the existing window of arbitrage. However, carry trade strategy does violate one of the fundamental theories that govern the foreign exchange market: the uncovered interest rate parity (UIP). According to the theory, UIP states that the expected change in the spot rate must reflect the interest differential between two currencies. The same theory predicts that the country with the high interest rate will witness its currency depreciate. Continue reading ‘USD Carry Trade’
Many of us are wondering how is US able to borrow trillions and trillions of dollars. Who is willing to lend them money, especially under current circumstances? The total US national debt is approaching $11.2 trillion. That is 11,200,000,000,000 US dollars. The Congressional Budget Office recently released a report in which they claimed that the total debt could reach $17.2 trillion dollars by 2019. What is mind-boggling is the amount of money that the US government pays every year to service this debt. For instance, the interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security, and national defense. Continue reading ‘It Is Good To Be King’
Today, before the markets opened in New York, there were plenty of encouraging signs coming from both fronts: corporate earnings and economic indicators. However, Dow Jones index lost 1 percent by the end of the trading day. One could say that the old “buy the rumor sell the news” has prevailed. Early morning, we found out that the sales of existing US homes surged a record 9.4 percent in September. Even though the number is extremely bullish, one should notice that half of the transactions were basically foreclosed properties. According to S&P, there are $408 billion in mortgages more than 90 days overdue and $332 billion in home loans that have been foreclosed or written off by lenders. Continue reading ‘The State of Global Recovery’
Since 2005, the National Bank of Romania (NBR) has switched to an inflation targeting regime. That target level has been established in terms of Consumer price Index (CPI) with an upper/lower band of +/- 1 percentage point. In a nutshell, the new monetary policy strategy encompasses few key elements: i) the public announcement of the target inflation; ii) full commitment to price stability, while other goals become second-order priorities and iii) an increased transparency of the central bank’s actions. One of the main drawbacks of this monetary regime is emerging once the inflation rate has been contained at low levels. At that point, the probability of undershooting or overshooting the inflation targets is high and the results could be very costly at both ends of the spectrum. Continue reading ‘In NBR We Trust’
Traders, economists, strategists, central bankers are all exposed to a new dilemma: is the US economy experiencing an inflationary or a deflationary pressure? On one side, under a global turmoil environment where most economies are shrinking considerably, prices tend to fall and subsequently the aggregate demand for goods and services subsides. On the other side, due to unprecedented central banks’ expansionary money supply policies many analysts expect a rapid increase in the level of prices. The solution to the problem still represents a challenge for many investors since the near-term investment strategy is very much correlated with the tendency of the price index. Continue reading ‘Inflation vs. Deflation’
These days, all over across the Wall Street and academia, many economists touch an extremely hot topic days: the quantitative easing policy. The world economy is facing the toughest recessionary pressure since the Great Depression and that calls for an unprecedented monetary policy from the central banks. Since June 29th 2006, when the federal target rate reached 5.25 percent, Federal Reserve has engaged into a monetary easing policy that took the benchmark interest rates in the vicinity of zero. Similarly, Bank of England has reduced the benchmark rate to half a percentage point, and European Central Bank adopted a dovish stance with interest rates down to historical low levels of 1 percentage point. On top of that, Fed has injected massive amount of liquidity into the financial system through the discount window loans, term-credit loans to banks and currency swaps to foreign central banks. As an extraordinary set of measures, from the beginning of the year Federal Reserve has announced two special programs: a program to purchase up to $300 billion of longer-dated Treasury securities and a program to purchase $1.25 trillion of agency mortgage-backed securities. Continue reading ‘FED’s Quantitative Easing’
Banks’ Free Lunch
Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley and Citigroup are largely gaining from a slowing in the write-down volume and a Federal Reserve-induced steep yield curve. Investors who bought US bank bonds are also benefiting from banks’ successful raising capital attempts and the repayment of TARP money. For instance, Citigroup put $20 billion back into the Treasury, Bank of America paid back $45 billion, JP Morgan $25 billion, Goldman Sachs $10 billion and Morgan Stanley returned $10 billion. Apparently, there is such thing as a free lunch, as long as a bank could borrow short-term money via the discount window, currently at 75 basis points, and it could lend long-term money at lucrative rates. According to Fed’s data, the net interest margin at larger US banks have increased to 3.38% in 2009, from a record low 2.94% in 2008. Last March, JP Morgan [JPM] was trading at $15, Goldman Sachs [GS] at $47, Citigroup [C] at $1, Bank of America [BAC] at $2.5 and Morgan Stanley [MS] at $15. These financial stocks reached their 52-week highs at astonishing levels: JPM at $47, GS at $192, C at $5, BAC at $19 and MS at $36. Continue reading ‘Banks’ Free Lunch’