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Inflation

NZD slides against the Japanese YenThe New Zealand Dollar (NZD) is trading bearish against the Japanese Yen (JPY) at 87.386 on Friday, October 27, 2023, following comments from Japan's Chief Cabinet Secretary Taro Matsuno that the Bank of Japan (BoJ) is expected to conduct appropriate monetary policy. Matsuno's comments come amid rising expectations that the BoJ will eventually tighten monetary policy in response to rising inflation in Japan. The BoJ has been maintaining an ultra-loose monetary policy stance for many years, but this has led to a significant weakening of the JPY in recent months. The NZDJPY currency pair has been under pressure in recent weeks as investors have priced in the possibility of a more hawkish BoJ. The pair has fallen by over 5% since the start of October. The bearish outlook for NZDJPY is further supported by the technical outlook. The pair has broken below a key support level at 88.00, and is now on track to test the next support level at 86.50. Factors Weighing on NZDJPY There are a number of factors weighing on NZDJPY at present, including: Expectations of BoJ tightening: The BoJ is expected to be one of the last major central banks to tighten monetary policy, which is putting downward pressure on the JPY. Rising inflation in Japan: Japan's inflation rate has been rising in recent months, which is putting pressure on the BoJ to tighten monetary policy. Global risk aversion: Global investors are currently risk averse, which is leading to a sell-off in riskier assets such as the NZD. Weak New Zealand economic data: The New Zealand economy has been slowing in recent months, which is weighing on the NZD. Technical Outlook for NZDJPY The technical outlook for NZDJPY is bearish. The pair has broken below a key support level at 88.00, and is now on track to test the next support level at 86.50. If NZDJPY breaks below 86.50, it could fall to 85.00 or even lower. Trading Strategy Traders who are bearish on NZDJPY could consider shorting the pair at current levels. A stop loss could be placed above the recent high at 88.00. A profit target could be placed at 86.50 or 85.00. It is important to note that the foreign exchange market is volatile and prices can move quickly. Traders should always use risk management techniques when trading currencies.
Short
by masterclass618
Inflation not down under!Australia's CPI data, released yesterday, showcased figures hotter than anticipated. While this may not be 'reaction-worthy' news on its own, the scenario in Australia is worth delving into for several reasons. Inflation Trends Initially, let's consider inflation trends. In most western economies, although inflation remains above central bank targets, the trends are on a downward trajectory. However, when juxtaposed against those for the European Union (EU) and the United States (US), Australia's (AU) inflation rates on a month-over-month (MOM) and year-over-year (YOY) basis still stick out from the norm. Moreover, yesterday’s CPI prints surpassed consensus on both the YOY & MOM basis, indicating a notable deviation from expectations. In fact, Australia's YOY CPI is now on its longest streak above inflation expectations, and crucially, inflation expectations have ceased revising downwards. Given the higher inflation levels compared to its peers, consensus estimates, and expectations, inflation remains a significant concern for Australia. Interest Rates In the realm of interest rates, Australia has been a long-standing “pauser,” having maintained its policy rate unchanged since its June meeting. This prolonged pause now further opens the leeway to raise rates, especially given the “watch and see” approach adopted towards burgeoning inflation. Additionally, its interest rates remain low compared to the US, EU, Canada, and even New Zealand. As a result, on the real rates basis, Australia trails far behind, with its policy rate still 1.3% behind its inflation rate, significantly less restrictive compared to other economies that have already moved into positive real rates territory. We posit that the RBA is behind the curve and has room to react, given the considerably long period of pause and still negative real rates. The market seems to echo this sentiment too, as the odds for a hike in the next meeting surged post the CPI news, moving from 21% to 55%! Against multiple currencies, the AUD appears to be threading above the long-term support level, a threshold that has essentially defined AUD low. This strong support is expected to hold, given its tested and respected level across multiple currency crosses since 2020. Policy turning points between the two currencies, as indicated by the turn in the interest rate differential, have generally marked the trend change for the currency, notably for the AUDEUR pair. Given the persisting high inflation in Australia compared to various economies and metrics, should market expectations trend in the right direction, it's plausible the Reserve Bank of Australia (RBA) may react with a rate hike. This action could tilt the rate differential and interest for the AUD, bolstering the currency. To capitalize on this bullish view on the AUD, we can consider a long position on the AUDEUR. We can set up this trade via a long position on the CME Australian Dollar Futures and a short position on the CME Euro FX futures to create a synthetic long AUD/EUR position at the current price level of 0.5951, stop at 0.5865 and take profit at 0.615. Given that one CME Euro FX futures is for 125,000 Euros and one CME Australian Dollar Futures is for 100,000 Australian Dollars, this suggest that we should use two Australian Dollar Futures to one Euro FX Futures to match the contract size, given that 125,000 Euros is roughly equivalent to 210,000 Australian Dollars at the prevailing exchange rate. Each 0.00005 increment in the Australian Dollar Futures is equal to 5 USD and each 0.00005 increment in the Euro FX Futures is equal to 6.25 USD. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com melbourneinstitute.unimelb.edu.au www.rba.gov.au www.asx.com.au www.cmegroup.com
ECONOMICS:AUINTRLong
by inspirante
2
AUD/USD extends gains, employment report nextThe Australian dollar has extended this week's gains. In the North American session, AUD/USD is trading at 0.6357, up 0.36%. Australia releases inflation on a quarterly basis, which magnifies the significance of each release. We'll get a look at third-quarter inflation on Wednesday, with a market consensus of 1.1% q/q, compared to 0.8% in Q2. Inflation is expected to fall to 5.3% y/y in Q3, down from 6.0% in the second quarter. Inflation eased in the second quarter, courtesy of a drop in fuel and food prices. The core inflation rate excludes energy and food prices but also declined in Q2 to 5.9% y/y, its lowest rate in a year. The drop in inflation is an encouraging sign and the Reserve Bank of Australia is hoping that the downtrend continues in the third quarter. Still, inflation is well above the RBA's target range of 2-3% and it will be a challenge for the central bank to bring inflation back to the target range. The RBA meets next on November 7th after holding rates for four straight months. What can we expect? Just two weeks ago, the rate odds for a quarter-point hike at the November meeting were just 3%, according to the ASX RBA rate tracker. That has ballooned to 21% currently, which means that while a fifth consecutive pause is likely, it is no longer considered a shoo-in. The RBA has been sending out a hawkish message, saying that the battle with inflation is far from over and further rate hikes remain on the table. Earlier today, Governor Bullock said the RBA "will not hesitate" to raise the cash rate over inflation fears. Despite the RBA's jawboning, the markets are leaning towards another pause, and provided that Wednesday's inflation report is not hotter than expected, it should cement a pause at the November meeting. AUD/USD has support at 0.6240 and 0.6184 0.6343 and 0.6399 are the next resistance lines
by fisherkj4
Inflation SupercycleOn the afternoon of October 3rd, 2023 something unprecedented happened in the U.S. Treasury market. For the first time ever, bear steepening caused the 20-year U.S. Treasury yield and the 2-year U.S. Treasury yield to uninvert. Bear steepening refers to a scenario in which long-duration bond yields rise faster than short-duration bond yields, as bond yields rise across the term structure. In all past instances, inverted yield curves have normalized due to bull steepening . The probability that bear steepening would cause an inverted yield curve to normalize is so low that, until now, most term structure models excluded the possibility of it ever happening. In this post, I'll explain why this anomalous event is a major stagflation warning. The chart above shows that the 10-year Treasury yield has been rising much faster than the 3-month Treasury yield throughout 2023, narrowing the once-deep yield curve inversion. Since a yield curve inversion indicates that a recession is coming, and bear steepening indicates that the market is pricing in higher inflation for the short term, and even more so, for the long term, then bear steepening during a yield curve inversion indicates that high inflation may persist even during the recessionary phase. High inflation during the recessionary period is what defines stagflation . Since very strong bear steepening is normalizing a deeply inverted yield curve, the combination of these events is a warning that severe stagflation is likely coming. High inflation has caused Treasury yields to surge at an astronomical rate of change. Bond prices, which move in the opposite direction as yields, have sharply declined causing destabilizing losses. The effects of these massive bond losses are not even close to being fully realized by the broad economy. The image above shows a bond ETF heatmap with year-to-date returns. Large losses have been mounting across numerous bond ETFs. Long-duration Treasury ETF NASDAQ:TLT has declined by more than 18% this year. Click here to interact with the bond ETF heatmap Despite the extreme pace of monetary tightening, many central banks are still struggling to contain inflation. Inflationary fiscal spending and ballooning debt-to-GDP levels are confounding central bank monetary policy efforts. In Argentina, for example, inflation continues to spiral higher despite the central bank raising interest rates to 133%. The chart above shows that the central bank of Argentina has hiked interest rates to 133%. Despite this extreme interest rate, the country's inflation rate continues to spiral higher. In an inflationary spiral, there is no upper limit to how high interest rates can go. As the Federal Reserve tightens the supply of the U.S. dollar -- the predominant global reserve currency -- all other countries (with less demanded fiat currency) generally must tighten their monetary supply by a greater degree in order to contain inflation. If a country fails to maintain tighter monetary conditions than the Federal Reserve, then the supply of that country's (lesser demanded) fiat currency will grow against the supply of the (greater demanded, and scarcer) U.S. dollar, causing devaluation of the former against the latter. In effect, by controlling the global reserve currency, the Federal Reserve is able to export inflation to other countries. This phenomenon is explained by the Dollar Milkshake Theory . The forex chart above shows FX:USDJPY pushing up against 150 yen to the dollar. The longer the Bank of Japan continues to maintain significantly looser monetary conditions than the Fed, the longer the yen will continue to devalue against the U.S. dollar. The meteoric rise in bond yields is particularly concerning because it has broken the long-term downtrend, signaling the start of a new supercycle. After hitting the zero lower bound in 2020, yields have rebounded and pierced through long-term resistance levels. The chart above shows that the 10-year U.S. Treasury yield broke above long-term resistance, ending the period of declining interest rates that characterized the monetary easing supercycle. We've entered into a new supercycle, one in which lower interest rates over time are a thing of the past. The new supercycle will be characterized by persistently high inflation. It will start off insidiously, with brief periods of disinflation, but over the long term it will accelerate higher and higher, ultimately causing today's fiat currencies to meet the same fate that every fiat currency in history has met: hyperinflation. * * * Important Disclaimer Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
FRED:M2SL
by SpyMasterTrades
46
GBP/USD flat as retail sales eyedThe British pound is drifting on Thursday. In the North American session, GBP/USD is trading at 1.2142, almost unchanged. The UK inflation report on Wednesday was a stark reminder that inflation remains stubborn and sticky. The Bank of England has raised the benchmark rate to 5.25%, but headline inflation was steady at 6.7% y/y and the core rate ticked lower to 6.1%, down from 6.2%. Both readings were higher than expected disappointed investors sent the British pound lower on Wednesday. A key driver of headline inflation was rising motor fuel prices. The Israel-Hamas war has raised tensions throughout the Middle East and if there are disruptions in crude oil, inflation would likely rise due to higher motor fuel costs. The UK wraps up the week with retail sales on Friday. The markets are braced for a weak September with a market estimate of -0.2%, following a 0.4% gain in August. On an annualized basis, retail sales declined by 1.4% in August, but are expected to improve to -0.1% in September. In the US, unemployment claims for the week of October 14th sizzled at 198,000. This was lower than the previous week's release of 211,000 (revised) and lower than the consensus estimate of 212,000. The US labour market has been showing signs of softening as the Federal Reserve's rate hikes continue to filter through the economy and dampen economic growth. The markets are always interested in what Fed members have to say, hoping for some insights into Fed rate policy. A host of FOMC members will deliver remarks today, highlighted by a speech from Fed Chair Powell at an event in New York City. Today's lineup has added significance as the Fed will enter a blackout period ahead of the meeting on November 1st. The sharp rise in US Treasuries has led to some Fed members saying that inflation could fall without further hikes, and investors will be watching to see if that dovish message is repeated today by Powell and his colleagues. There is resistance at 1.2163 and 1.2202 1.2066 and 1.1987 and providing support
by fisherkj4
S&P500 adjusted for Money Suppy is unchanged for 26 years In order to get the decimal point to the right of a number, I had to multiply AMEX:SPY by 1,000,000,000,000 or 1 Trillion. The price of the market is unchanged since January 1997 with the adjustment. That is an incredible 26 years where prices haven't bean 'inflation as measured by the quantity of money' floating around in the banking system. Nominally, our purchasing power if stored in stocks has been maintained over that time period, which is good. BUT, if you think you are wealthier over these last 26 years, it may be because of your ability to pick stocks that do better than the market overall. The Nasdaq likely did far better than the S&P500, for example. 321 months sideways and plenty of deviation around the level we are at now. I have adjusted other charts for inflation to make a point and I wanted to add this one, which is more aggressive, to the bunch. Tim West October 18, 2023. 12:58PM EST
AMEX:SPY
by timwest
11
UK Inflation - worse things to come?Overview The UK's September inflation figures were released today. Inflation has not come down and continues to be high. This puts the Bank of England (BOE) in a dilemma. The Details UK YOY inflation has been released as 6.70%, the same as the previous month. Despite the BOE's rate hikes, UK inflation remains high and looks stubborn now. This could be the start of some significant economic challenges for the UK. Further rate hikes - the conventional policy is to continue to raise rates. Expect another rate hike from the BOE - possibly even rate hikes, yes, plural. The problem with this is the current rates are having a significant pinch on UK households. To raise rates further, signs the financial death warrant on many UK households. To beat inflation, the BOE may need to keep hiking rates until something breaks, i.e. the UK hits recession. Stop raising rates - this could be seen as irresponsible and letting inflation off its leash. So, continue to raise rates and break the UK economy, or hold rates and let inflation get out of control. Things to consider: This is early days. It will take some time for the above to dawn on the market. As this is early days, inflation for October may be lower, so the "panic" will be over quickly. Holding or raising rates could be bad news for GBP. It is a sell either way. Raise rates and the UK hits recession. Don't hike rates and get hit with high inflation. The latter will cause more substantial downside moves on GBP pairs.
by Samuel_Morton_Trader
GBP/USD slips on strong US retail salesThe British pound has declined 0.56% against the US dollar on Wednesday, wiping out yesterday's gains. In the North American session, GBP/USD is trading at 1.2158, down 0.48%. The pound's downswing was driven by a higher-than-expected US retail sales report. Retail sales in the US surprised on the upside with a gain of 3.8% y/y in September. This beat the upwardly revised 2.9% rise in August and crushed the market estimate of 1.5%. On a monthly basis, retail sales rose 0.7%, compared to an upwardly revised 0.8% in August and well above the market estimate of 0.3%. Core retail sales, which exclude automobiles and gasoline, rose by 0.6% m/m, down from an upwardly revised 0.9% in August but easily beating the market estimate of 0.2%. The better-than-expected retail sales report indicates that consumer spending remains robust despite the challenging economic picture, which includes high inflation and elevated borrowing costs. Consumer spending likely accelerated in the third quarter and that will be reflected in the consumer spending component of GDP. The UK releases inflation on Wednesday. September CPI is expected to tick lower to 6.6% after a 6.7% reading in August. Inflation is at its lowest level since February 2022 but remains more than three times above the Bank of England's 2% target. The core rate, which excludes food and energy is closely monitored by the BoE, is expected to dip to 6.0%, compared to 6.2% in August. If inflation falls as expected or even further, it will provide support for the BoE to pause for a second straight time at the November 2nd meeting and the pound could react with losses. The Bank's decision to hold rates at the October meeting was a narrow 5-4 vote and Governor Bailey said yesterday that he expected upcoming rate decisions to be tight as well. GBP/USD has pushed below support at 1.2202. Below, there is support at 1.2104 There is resistance at 1.2281 and 1.2343
by fisherkj4
US Govt Real Debt is Down Last 3 YearsThe "real value of the US Gov't Debt" is a different way of looking at our situation through rose-colored glasses, but it is a fair analysis. If we "adjust the debt level for inflation" as measured by the CPI Index (All Urban Consumers Index) from the beginning of the series back in 1966, you will have a line that is grinding SIDEWAYS since October 2020 at a reading of $105.9 Billion. The latest number was the July reading at $105.1 Billion which is a slight decline. All of this sounds like "hocus-pocus" but it is a fact that inflation makes it easier for the Gov't to pay off its debt in the new "cheaper valued" dollars. The dollar is the same, only there are far more of them floating around in the system so each of them is worth less. If we analyze how the US debt has increased relative to other countries' debt, we could also see how we are doing. The financial market's are open for analysts to find discrepancies between the value of various currencies and over time, the market adjusts for the amount of currency being created in an economy. We can look at the TVC:DXY or US Dollar Index to see how the US economy has fared versus its trading partners. The Dollar Index is weighted for the amount of trading between the various currencies. I can follow up on that analysis in the next chart. For now, we can at least see an optimistic chart about the actual "REAL" amount of debt that the US Gov't (which is US, the taxpayers) has over the last 3 years. Covid spending and lockdown payments to keep the economy afloat certainly launched us up into the stratosphere FIRST but since 2020 that debt has been in a sideways pattern.
FRED:GFDEBTN
by timwest
6
NZD/USD rises on strong Services PMIThe New Zealand dollar has started the week with strong gains. In the European session, NZD/USD is trading at 0.5919, up 0.55%. It was a miserable week for the News Zealand dollar, which fell 1.74%, its worst weekly performance since August. The driver for today's gains was the New Zealand Services PMI, which rose to 50.7 in September, up from 47. 7 in August. This reading is barely in expansion territory, but it indicates a welcome rebound after three straight declines - the 50 level separates contraction from expansion. As is the case with most major economies, the services sector is in better shape than manufacturing. Last week's Manufacturing PMI weakened to 45.3 in September, down from 46.1 a month earlier. This marked a seventh straight decline and was the lowest reading since August 2021. Inflation is still on everyone's mind and continues to have a strong impact on the currency markets. This was reiterated last week with last Thursday's US inflation report, which remained unchanged at 3.7% and was just above the market estimate of 3.6%. The release unnerved investors and sent risk appetite and risk currencies tumbling. The New Zealand dollar was steamrolled, sliding 1.54% on Thursday. New Zealand will release third-quarter inflation on Tuesday. The market estimate stands at 2.0% q/q, which would be a sharp rise from the 1.1% gain in the second quarter. The sharp rise in gasoline prices is expected to boost inflation. Core CPI, which excludes energy prices, will be closely watched by the central bank and policy makers will be looking for a decline on Tuesday. If that doesn't happen, expectations of a rate hike in November will likely rise. NZD/USD put pressure on resistance at 0.5942 earlier. The next resistance line is 0.5999 There is support at 0.5888 and 0.5827
by fisherkj4
UK and Canadian Inflation RatesOverview UK and Canadian inflation rates will be released next week. These events could provide insight into whether the Bank of England(BOE) and the Bank of Canada(BOC) decide to raise rates further. The Details As things currently stand, the BOE will likely pause rates, and the BOC will raise rates again. This is in line with the current inflation figures. Next week's inflation figures - Tuesday 17th for Canada and Wednesday 18th for the UK - may give more precise direction to what the BOE and BOC decide what to do next: hike, cut, or pause. August's inflation figure for Canada was 4.00% and 6.70% for the UK. Things to Consider: If September's inflation figures are higher or the same as August's, this gives a greater chance of further rate hikes. Another rate hike from the BOC will likely strengthen the CAD. Another rate hike from the BOE will likely strengthen the GBP. If September's figures are lower than August's, this gives a greater chance of the central banks holding rates and lowering rates in the near future. This will weaken the CAD and GBP. Key CAD pairs could be FX:EURCAD FX:GBPCAD FX:AUDCAD Key GBP pairs could be FX:GBPAUD FX:GBPCAD FX:GBPNZD
by Samuel_Morton_Trader
USD/JPY heads closer to 150 after US inflation reportThe Japanese yen is slightly lower on Friday. In the European session, USD/JPY is trading at 149.63, down 0.12%. The US inflation report for September was unchanged at 3.7% y/y, but this was higher than the market estimate of 3.6% y/y and the market reaction sent the US dollar higher against all the major currencies. USD/JPY rose 0.43% on Thursday, hitting a high of 149.82. The yen has recovered slightly but the critical 150 line remains within striking distance. Earlier in the month, the yen spiked higher after breaching 150 and the markets were abuzz with speculation that the Ministry of Finance (MOF) had intervened to prop up the yen. The MoF kept the markets guessing, as it likes to do, but the central bank's money market data indicated that it likely did not intervene. Still, the 150 line remains a psychologically important level and another breach could trigger volatility from the Japanese currency. The markets responded to the higher-than-expected US inflation release, as expectations increased that the Fed would be forced to continue its "higher for longer" rate policy and could even raise rates one final time before the end of the year. Overshadowed by all the talk about the hot CPI was the fact that the core rate dropped from 4.3% to 4.1%, matching expectations. This should encourage the Fed, which pays more attention to the core rate, as it is considered a better gauge of inflation trends. US unemployment claims pointed to a resilient labor market that has cracks but refuses to break. For the week ending October 7th, unemployment claims were unchanged at 209,000, below the estimate of 210,000. This is further evidence that the labour market remains very tight, which is complicating the Fed's efforts to bring inflation back down to the 2% target. 150.21 and 151.13 are the next resistance lines 149.23 and 148.31 are providing support
by fisherkj4
USD/JPY heads closer to 150 after US inflation reportThe Japanese yen is slightly lower on Friday. In the European session, USD/JPY is trading at 149.63, down 0.12%. The US inflation report for September was unchanged at 3.7% y/y, but this was higher than the market estimate of 3.6% y/y and the market reaction sent the US dollar higher against all the major currencies. USD/JPY rose 0.43% on Thursday, hitting a high of 149.82. The yen has recovered slightly but the critical 150 line remains within striking distance. Earlier in the month, the yen spiked higher after breaching 150 and the markets were abuzz with speculation that the Ministry of Finance (MOF) had intervened to prop up the yen. The MoF kept the markets guessing, as it likes to do, but the central bank's money market data indicated that it likely did not intervene. Still, the 150 line remains a psychologically important level and another breach could trigger volatility from the Japanese currency. The markets responded to the higher-than-expected US inflation release, as expectations increased that the Fed would be forced to continue its "higher for longer" rate policy and could even raise rates one final time before the end of the year. Overshadowed by all the talk about the hot CPI was the fact that the core rate dropped from 4.3% to 4.1%, matching expectations. This should encourage the Fed, which pays more attention to the core rate, as it is considered a better gauge of inflation trends. US unemployment claims pointed to a resilient labor market that has cracks but refuses to break. For the week ending October 7th, unemployment claims were unchanged at 209,000, below the estimate of 210,000. This is further evidence that the labour market remains very tight, which is complicating the Fed's efforts to bring inflation back down to the 2% target. 150.21 and 151.13 are the next resistance lines 149.23 and 148.31 are providing support
by fisherkj4
NZD/USD sinks after US CPI report, NZ Mfg. Index nextThe New Zealand dollar is sharply lower on Thursday. In the North American session, NZD/USD is trading at 0.5943, down 1.27% on the day. The US dollar has strengthened against the major currencies after today's inflation report and the New Zealand dollar has been hit particularly hard. On Friday, New Zealand releases the manufacturing index, which is expected to rise to 46.9 in September, compared to 46.1 in August. A reading below 50.0 indicates contraction. The September US inflation report was half-good-half bad, as headline CPI was unchanged while Core CPI declined. Headline CPI remained unchanged at 3.7% y/y, higher than the market estimate of 3.6% y/y. The core rate, which is a better gauge of long-term inflation trends, fell from 4.3% to 4.1% y/y, matching the market estimate. This marked the lowest level since September 2021. The stronger-than-expected headline CPI has raised expectations that the Federal Reserve will keep rates elevated for longer and could raise rates before the end of the year. The battle to bring inflation back down to the Fed's 2% target won't be easy, but a new wrinkle in the equation is the sharp rise in US Treasury yields. That has meant higher borrowing costs, and some Fed members have sounded more dovish, saying that the rise in yields could slow growth and push inflation down without the Fed having to raise rates. There is some dissension among Fed policymakers with regard to policy, as yesterday's FOMC minutes indicated. At the September meeting, the Fed held rates for the first time in the current tightening cycle. A majority said that a rate hike would be needed "at a future meeting", while a minority felt no more hikes were necessary. All agreed that policy should remain restrictive until the Fed was confident that inflation "is moving down sustainably" to its target. The US dollar has posted broad gains following the inflation release, and the Fed rate odds of a hike before the end of the year have jumped to 38%, up from 26% prior to the inflation report, according to the CME FedWatch Tool. NZD/USD is testing support at 0.5956. The next support level is 0.5905 There is resistance at 0.6042 and 0.6093
by fisherkj4
Myth-busting: top 6 misconceptions about commoditiesWisdomTree has long-standing expertise in commodities, and this asset class constitutes a core part of our business. We aim to debunk several myths that surround commodity investing1. Myth 1: Commodities are only a tactical instrument Some believe that commodities trade in a range and do not outperform over the long term. Furthermore, they think commodities only outperform in an ‘up’ phase of a commodity ‘super-cycle’. Physical commodities are the fundamental building blocks of our society. Therefore, it is no surprise that their price movements largely explain inflation and tend to at least match inflation over the long term. Furthermore, commodity investors most often invest in futures contracts, not physical commodities. Futures contracts have been designed as hedging tools to allow commodity producers and miners to hedge their production forward, making their businesses sustainable and allowing them to invest because they are insulated from the commodity prices’ short-term volatility. Producers are willing to pay for this hedge, just as they would pay for insurance. Therefore, investors who provide this hedge by buying futures contracts receive an insurance premium that allows them to beat inflation over the long term. This ‘insurance’ is a permanent feature of commodity futures and doesn’t fall away through economic cycles. Thus, commodity futures are suitable for consideration as a strategic investment, not just tactical investments. Commodities futures provide a positive risk premium, driven by their intrinsic link to inflation and embedded ‘insurance premium’. While upward phases of commodities’ super-cycle are historically advantageous for commodity investors, future-based broad commodity investments can deliver a risk premium in any part of a super-cycle. Myth 2: Losses are guaranteed when commodities are in contango Contango (negative roll yield) and backwardation (positive roll yield)2 are used to describe the state of the futures curve. It describes the relative position of the current spot price and the futures contract price. Drivers of roll yield include storage costs, financing costs, and convenience yield. Backwardation is often associated with demand strength when people are willing to pay more for immediate delivery than lock into a contract for later delivery at a cheaper price. Some believe that, because contango is the opposite state of backwardation, losses are guaranteed as a corollary. The fact that Keynes’ theory is called ‘normal backwardation’ has caused some terminology confusion. However, what is described by Keynes is that futures contracts are generally priced at a discount to the expected spot price at expiry. It has nothing to do with the current spot price. In other words, the curve can be in contango, and the future price can still be at a discount to the expected spot price at maturity, that is, be in normal backwardation as well. Using a numerical example, let’s say that WTI Crude Oil is worth $50 today. The market expects WTI Oil to trade at $55 in a month (expected spot price) because of storage and other costs. Keynes’ theory hypothesis is that the 1-month futures contract will be priced at a discount to $55, let’s say $54, to incentivise speculators to provide the hedge to producers. In this situation, the curve is in contango ($54>$50), and the expected risk premium is still positive at $1. So, a curve in contango and a positive risk premium can coexist. While the shape of the curve has an impact on the performance, it is not a good predictor of future performance. Myth 3: Commodities are riskier and more volatile than equities. There is a common perception that commodities are riskier than equities. Equities and commodities are similar asset classes statistically. Their historic returns and volatility are quite close. Historically, commodities have exhibited higher volatility than equities in 42% of the 3Y periods since 1960. However, in a larger number of periods (58%) equities have shown higher volatility. More importantly, the two assets’ distributions differ from a normal distribution with a significantly higher skew. But commodities have the advantage. They exhibit a positive skew (a tendency for higher-than-expected positive returns), when equities are known for their negative skew (their tendency to surprise on the downside). Commodities have exhibited lower volatility than equities in 58% of the time rolling 3-year periods we studied and benefit from positive skew. Myth 4: Commodities stopped being an effective diversifier after the 2008 Global Financial Crisis presented a structural break in commodity price relationships Markets are becoming more and more efficient. With those changes, assets have become more correlated. It is clear that commodities have been more correlated to equities in the last 10-20 years than before. However, this is true of most asset pairs as well. US equities are more correlated to global equities. Equities are more correlated to high yield bonds. In a globalised world where correlations are more elevated, commodities still stand out for their lower level of correlation. Note, commodities have continued to provide a cushion against equity and other asset crises in recent periods. For example, in 2022, commodities rose 16%, while US equities3 fell 18% and bonds4 fell 16%. While 2008 marked an all-time high for the correlation between equities and commodities, their correlation has always oscillated. There have been earlier spikes of similar magnitude in the 1960s and 1980s. In 2020, we saw a similar spike in correlation, but correlations have more than halved since in 2023. Commodity vs equity correlation tends to oscillate and has remained within normal historical ranges. Myth 5: Inflation linked bonds are better than commodities at inflation-hedging Some assets are often considered good inflation hedges, such as inflation-linked bonds (TIPS) or real estate. However, it is surprising that more people don’t recognise the superior inflation-hedging properties of commodities. The beta to inflation (US Consumer Price Index (CPI)) of inflation-linked bonds and real estate, historically, is significantly lower than that of commodities (2.45): US TIPS (0), US Equity Real Estate Sector (1), House Prices (0.4). Furthermore, while broad commodities’ average monthly performance tends to increase when the CPI increases, this is not the case for other assets. The performance of TIPS appears to be relatively unrelated to the level of CPI. The performance of real estate, being equities or real assets, seems to worsen when the CPI increases. Real estate suffers from the fact that, while rental incomes are linked to inflation (rents are part of the CPI basket, for example), the capital values themselves are not, and yet have a larger impact on the asset's price. Similarly, inflation-linked bonds are linked to inflation, but their price is also tied to real yields changes (through a duration multiplier) which tends to dilute the relationship to inflation itself. Historically, commodities have been a better hedge to inflation than TIPS or real estate assets. Myth 6: Futures are the best way to access gold for institutional investors Futures markets tend to be extremely liquid and offer very low transaction costs. Therefore, investors assume that, if they can, it is always the most efficient way to implement a trade. However, futures markets respond to their own constraints where banks tend to provide most of the hedging. Recently, banks have suffered from increasing regulation and operating costs that they have translated into their pricing of futures contracts, leading to significant tracking differences with the physical asset. Sometimes futures contracts are the only way to access a commodity, but for precious metals this is not the case. For gold, this cost has, historically, represented 0.9%6 per year on average compared to owning gold bullion. Physically backed exchange-traded commodities (ETCs) have many advantages: limited operational burden, reduced tracking difference, cheap and liquid. It is clear that commodities are a frequently misunderstood asset class, and many misconceptions remain today. For a fuller description of the fundamentals of commodity investing, please see The Case for Investing in Broad Commodities. Sources 1 These myths were all addressed in The Case for Investing in Broad Commodities, November 2021, which takes a deep dive into commodity investing. This blog summarises and updates data addressing several of the ‘misconceptions’ listed in the piece. 2 For more information on contango and backwardation, see our educational ETPedia hub (specifically the ‘Costs and Performance’ tab). 3 S&P 500 TR. 4 Bloomberg GlobalAgg Index (government, corporate and securitised bonds, multicurrency across developed and emerging markets). 5 Source: WisdomTree, Bloomberg, S&P, Kenneth French Data Library. From January 1960 to July 2023. Calculations are based on monthly returns in USD. Broad commodities (Bloomberg commodity total return index) data started in Jan 1960. US TIPS (Bloomberg US Treasury Inflation-linked total return bond index – Series L index) data started in March 1997. US Equity Real Estate (S&P 500 Real Estate sector total return index) data started in October 2001. US House Price (S&P Corelogic Case-Schiller US National Home Price seasonally adjusted index) data started in January 1987. Historical performance is not an indication of future performance and any investments may go down in value 6 Source: WisdomTree, Bloomberg. From 4 June 2007 to 31 July 2023. The Performance of the physical Gold was observed at 1.30 PM Eastern Time to match the BCOM sub-index calculation time. You cannot invest in an Index. Historical performance is not an indication of future performance and any investments may go down in value. This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
CBOT:AW1!
by aneekaguptaWTE
1
Markets embrace the Higher-for-Longer themeIt has been a big week of central bank policy announcements. While central banks in the US, UK, Switzerland, and Japan left key policy rates unchanged, the trajectory ahead remains vastly different. These central bank announcements were accompanied by a significant upward breakout in bond yields. Interestingly most of the increase in yields has been driven by higher real yields rather than breakeven inflation signifying a tightening of conditions. The bond markets appear to be acknowledging that until recession hits, yields are likely to keep rising. Connecting the dots The current stance of monetary policy continues to remain restrictive. The Fed’s dot plot, which the US central bank uses to signal its outlook for the path of interest rates, shows the median year-end projection for the federal funds rate at 5.6%. The dot plot of rate projections shows policymakers (12 of the 19 policymakers) still foresee one more rate hike this year. Furthermore, the 2024 and 2025 rate projections notched up by 50Bps, a signal the Fed expects rates to stay higher for longer. The key surprise was the upgrade in growth and unemployment projections beyond 2023, suggesting a more optimistic outlook on the economy. The Fed’s caution is justified amidst the prevailing headwinds – higher oil prices, the resumption of student loan payments, the United Auto Workers strike, and a potential government shutdown. Quantitative tightening continues on autopilot, with the Fed continuing to shrink its balance sheet by $95 billion per month. Risk assets such as equities, credit struggled this week as US yields continued to grind higher. The correction in risk assets remains supportive for the US dollar. A hawkish pause by the Bank of England In sharp contrast to the US, economic data has weakened across the board in the UK, with the exception of wage growth. The weakness in labour markets is likely to feed through into lower wages as discussed here. After 14 straights rate hikes, the weaker economic backdrop in the UK coupled with falling inflation influenced the Bank of England’s (BOE) decision to keep rates on hold at 5.25%. The Monetary Policy Committee (MPC) was keen to stress that interest rates are likely to stay at current levels for an extended period and only if there was evidence of persistent inflation pressures would further tightening in policy be required. By the next meeting in November, we expect economic conditions to move in the MPC’s favour and wage growth to have eased materially. As inflation declines, the rise in real interest rates is likely to drag the economy lower without the MPC having to raise interest rates further. That said, the MPC is unlikely to start cutting rates until this time next year and even then, we only expect to see a gradual decline in rates. Bank of Japan maintains a dovish stance Having just tweaked Yield Curve Control (YCC) at its prior Monetary Policy Meeting (MPM) on 28 July, the Bank of Japan decided to keep its ultra easy monetary settings unchanged. The BOJ expects inflation to decelerate and said core inflation has been around 3% owing to pass-through price increases. Governor Ueda confirmed that only if inflation accompanied by the wages goal was in sight would the BOJ consider an end to YCC and a rate shift. With its loose monetary policy, the BOJ has been an outlier among major central banks like the Fed, ECB and BOE which have all been hiking interest rates. That policy divergence has been a key driver of the yen’s weakness. While headline inflation in Japan has been declining, core inflation has remained persistently higher. The BOJ meeting confirmed that there is still some time before the BOJ exits from negative interest rate policy which is likely to keep the Yen under pressure. The developments in US Monetary Policy feeding into a stronger US dollar are also likely to exert further downside pressure on the Yen. This year global investors have taken note that Japanese stocks are benefitting from the weaker Yen, relatively cheaper valuations and a long-waited return of inflation. Japanese companies are also becoming more receptive to corporate reform and shareholder engagement. Adopting a hedged Japanese exposure Taking a hedged exposure to dividend paying Japanese equities would be a prudent approach amidst the weaker yen. This goes to a point we often make - currency changes do not need to impact your foreign return, and you can target that local market return by hedging your currency risk. A hedged Japanese dividend paying equity exposure could enable an investor to hedge their exposure to the Yen. This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
TVC:US10Y
by aneekaguptaWTE
1
SPY Retest Complete. And Macro-Economic Ramblings of a Mad Man.Traders, As expected, SPY bounced off of that 200-day SMA and performed a classic retest of the underside of our previous support, the neckline of our H&S. Now, the only question that remains is do the bulls have enough in them to break back above or do we remain on the underside of this neckline and potentially drop back down ...maybe even breaking the bottom of my channel (green) to proceed to our target down at $410? These questions remain unclear as of now, especially since the advent of yet another unsettling geopolitical situation and war in the Middle East. But I will watch this closely and keep you all up to speed. As of now, my bet remains that we continue upward somewhere within the boundaries of my channel even with another retest of the bottom. This supposition is mainly built upon what the dollar is doing now and will continue to do with the unprecedented allotment of U.S. dollars that will have to be printed and distributed to keep other country's wars continuing, fund the migrant costs (both direct and indirect), our regional banks afloat via guaranteed deposits, and the future economic collapse here in the U.S. that may start in commercial real estate or the housing market sector again. All of this (and we have not even introduced BRICS) will crush the dollar, eventually. Once this occurs it will take many more devalued dollars to buy a thing of worth, including stocks. More dollars to buy shares in a company will give the trading public an illusion of strength. An illusion is all that is needed. And on up we roar to complete Wave #5, the blowoff top. Best, Stew
AMEX:SPY
by stewdamus
SP500 BULL ACCUMULATIONHello! I see SP500 has formed some bottom on 12H timeframe and closed beyond previous 12H High Point. Bulls are gaining more strength in this market, that has seen 3 weeks of countinious decline. It looks just about to swing higher. Taking into consideration that previous weeks NFP data came out much stronger then forecast, about 330k new payrolls added to the economy tells of a strong labor market. This adds to the FEDs case to raise interest rates further and would be bearish for the SP500. This was not the expected market reaction, instead a small decline was followed by a steep increase and that is telling me bears are running out of steam. Write in the comments what you think will happen next week!
BLACKBULL:SPX500Long
by eediiz