Comment of the Day
12th July 2023
Eoin Treacy
Jul 13
Video commentary for July 12th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Inflation at 3% Flags End of Emergency, Turning Point for Fed
This article from Bloomberg may be of interest to subscribers. Here is a section:
None of this means it’s game over in the fight against price pressures — especially for the Fed, which is widely reckoned to be locked-in to another interest-rate increase later this month. Still, there’s now a better-than-even chance that a July 26 hike, which would take the benchmark US rate to 5.5%, could be the last in quite a while.
That’s the way markets were betting after Wednesday’s data. Yields on short-term Treasury yields plunged, stocks rose, and the dollar was headed to the lowest in more than a year by one measure – all in anticipation that the Fed might ease up.
‘Coming to End’
“The new data could give the Fed reason to debate whether any further rate hikes after this month are needed,” wrote Ryan Sweet, chief US economist at Oxford Economics. “This tightening cycle by the Fed is likely coming to an end.”
Eoin Treacy's view
CPI is back inside the pre-pandemic range but the core figure is still at elevated levels. That represents a partial win for the Federal Reserve. The challenge is regular CPI is supposed to be more prone to volatility than the core figure.
Jerome Powell has stated he is focusing on the core services less housing figure. That has been steady around 4.5% since August 2022 and is the primary data point suggesting inflation is sticky. Nevertheless, traders are betting the July hike will be the last in this cycle.
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CPI Heating Up Now, RBI to Extend Hawkish Hold
This article from Bloomberg may be of interest. Here is a section:
Cumulative rains since the monsoon season started on June 1 were 30% below their long-term average on June 24. Heavy rainfall over the last few weeks has erased that deficit and cumulative rains now amount to a surplus of 2% as of July 12.
Heavy rains have also resulted in flash floods in northern India and damaged some crops. Overall, we believe rains would be beneficial for the summer crop, but excess rains can also hurt farm output in areas that have been flooded.
It is still early to say how the regional distribution of the rains pans out over the entire monsoon season, which lasts through September. The heightened risk of El Nino this year threatens to weaken the rain clouds over the South Asian subcontinent.
According to our estimates, the damage to farm output from El Nino could boost headline inflation by as much as 0.5 percentage point.
Eoin Treacy's view
It’s hot in the desert during summer, India gets excessive rain during the monsoon and it rains a lot in Ireland. Bloomberg’s typo today was funny and might be described as taking climate alarmism too far. (The lava flows are currently in Iceland).
For India a normal monsoon is generally considered good news. There will always be some untoward damage from excessive rains but reduced rainfall would be a much bigger issue. India still has a large number of people working on farms and with such a large population the price of food tends to play an important role in driving inflationary trends.
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Credit Suisse AT1 Fallout Embroils More Japan Brokerages
This article from Bloomberg may be of interest to subscribers. Here is a section:
Switzerland’s decision in March to write down the bonds as part of a government-led rescue of Credit Suisse shocked investors in Japan, who bought around 140-billion-yen ($1 billion) worth of the debt. Clients of Mitsubishi UFJ Financial Group Inc.’s securities venture with Morgan Stanley (NYSE:MS) took the lion share of the hit. The debacle in a country that’s trying to push its citizens to invest more has prompted regulators to look into whether the firms properly explained the risks before selling the bonds.
“In consideration of the product characteristics of AT1 bonds of Credit Suisse Group AG (NYSE:CS), we have sold those securities to customers to whom we thought the products would be suited, after having sales staff explain about them in person,” an SBI spokesperson said by email, in response to questions about the documents.
Rakuten Securities Inc. sold the debt through its business partners called independent financial advisers and is “reviewing and inspecting” its sales practices and explanatory materials, a spokesperson said by email. The firm will “continue to follow up” with the buyers and “appropriately respond” should they decide to escalate the issue, she said.
Eoin Treacy's view
The prospectus for several of the Swiss AT1 bonds included the provision that holders would be wiped out in the event of default. For institutions the onus is on the relevant departments within a bank or fund to read the prospectus. The reality is that generally only occurs after a crisis. Regular consumers are not expected to understand the intricacies of high finance. For them the onus is on the seller. That ensures there will be some difficult conversations but the broader question is how much damage this episode has done to Switzerland’s reputation among international investors.
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Eoin's personal portfolio: stock market leveraged long breakeven stop triggered June 26th
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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