Global Economic Outlook: Rates Theater and Lending Squeeze


The spectre of a rates increase keeps being dangled in front of markets. The tension has become too much for many investors and on Monday Asia began another wave of shares selling. The commodities rout extends to producers.

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Economic Indicators

World Indexes and Forex Rates

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Commodities

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In the Calendar This Week

Mon 28 September
US FOMC Member Dudley Speaks
US Pending Home Sales m/m (actual:-1.4% expected:0.4% previous:0.5%)

Tue 29 September
US CB Consumer Confidence (expected:96.2 previous: 101.5)

Wed 30 September
New Zealand ANZ Business Confidence (previous:-29.1)
New Zealand Building Approvals m/m (expected:-1.8% previous: 4.2%)
UK Current Account (expected:-22.2bil previous: -26.5bil)
US ADP Non-Farm Employment Change (expected:192k previous: 190k)
US GDP month/month (expected:192k previous: 190k)

Thu 1 October
China Manufacturing PMI (expected:49.7 previous:49.7)
China Caixin Final Manufacturing PMI (expected:47.2 previous:47.0)

UK Manufacturing PMI (expected:51.3 previous:51.5)
US Unemployment Claims (expected:273K previous:267K)
US ISM Manufacturing PMI (expected:50.8 previous:51.5)

Fri 2 October
Australia Retail Rates (expected:0.4% previous:-0.1%)
UK Construction PMI (expected:57.5 previous:57.3)
US Non-Farm Employment Change (expected:202k previous: 173k)
US Unemployment Rate (expected:5.1% previous: 5.1%)

Making The News

This edition of Global Economic Outlook illustrates that rates are already being raised and that readers can safely ignore the media and Fed official chatter about a starter-gun date. A good show always has diverse characters and engaging sub-plots, but the trick here is not to get side-tracked by the rhetoric and to focus on the main plot – credit contraction.

Federal Reserve’s Evans Supports 2016 Rates Hike, More QE

In a prepared speech delivered yesterday, Chicago Federal Reserve President Charles Evans outlined his position that a cautious approach to rates increases was prudent and that the “best case” would be no rates hike before 2016.

He prefers a strategy of gradually increasing rates by 75 basis points by the end of 2016 – that’s an increase to 1% from the current 0.25%.

Evans motivates his position with the view that “normalizing” policy too quickly increases risks amid “pressure on inflation” (interpret: risks deflation) from sagging energy and commodity prices and “subdued” labor market growth.

Additionally, he surprised by stating that more quantitative easing – a policy the Fed has just exited with great difficulty – would benefit the stimulus to higher rates.

Only last week, Fed Chair Janet Yellen confidently stated:

Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime this year.
– Fed Chair Yellen.

Good-Banker/Bad-Banker Routine

So, how does one reconcile these polar dovish and hawkish messages coming from the central bank? Our interpretation is that it is grand theater.

Readers are referred to CCN.LA’s Global Economic Outlook of September 14 in which we outlined the Fed’s strategy for reducing lending via a behind-the-scenes lending deal with the shadow banking sector.

The Fed will effectively be paying shadow banks (deep-pocketed investment banks) not to lend money to the run-of-the-mill regulated banks.

The new mechanism is called the Overnight Reverse Repurchase Agreement. The largest willing lenders are enticed to lend to the Fed instead of the regular banks who, in turn, have no borrowing alternative to the existing Fed Funds Rate mechanism. The long-term objective is to discourage bank lending by always offering the largest lenders (shadow banks) a higher overnight interest rate, and so, interest rates gradually rise and control of interest rates remains in the hands of the Fed.

Presumably, the funding for interest payments, made by the Fed, will be generated by the same mechanism that the Fed has always used to “print money”: by “buying” bonds from designated market players and other central banks. This could also be the QE that Chicago Fed President Evans referred to in yesterday’s speech.

Hence, the struts and frets of Fed officials on the canvas of the world media, is all just show. Rates are already being raised, covertly, via a clever credit contraction strategy devised by the Fed.

Also In The News

Asian Shares Down

With all the rates theater and compounding negative economic data, uncertain investors are losing their nerve. Asian markets just couldn’t bull it anymore this Monday.

Selection_20150929_006Japanese share prices fell to an 8-month low as investors nervously anticipate the Bank of Japan’s Tankan quarter-on-quarter business confidence survey, this coming Thursday.

The Nikkei dropped 3.2% to 17,086.27 – its lowest level since January 2015.

Chinese industrial profits data revealed a drop from -2.9% (2014) to -8.8% at August 2015.

The Shanghai Composite Index continued decline to 3,065, and Hong Kong’s Hang Seng Index fell 3.2% to near its 20,000 psych level. Additional Chinese manufacturing surveys (PMI) will be released on Thursday. Despite official upbeat forecasts and excuses, the extent of the slow-down in the world’s second largest economy is becoming a matter of grave concern.

Hong Kong-listed shares of miner Glencore fell 27% to a record low of 9 Hong Kong dollars while a similar drop was underway in London’s FTSE. Australian mining juggernaughts BHP Billiton and Rio Tinto also sagged more than 5% each, after competitor Glencore’s debt concerns caused loss of a third of its value during Monday trade.

When the general mood been positive, investors and analysts explain away fundamental concerns in optimism for a “bright future”, but when the mood is negative any little unpleasnt detail easily becomes the catalyst for a sell-off – Glencore and Volkswagen being prime current examples.

Final Thoughts…

The quintessential central banker quote of 2015 deserves a repost:

My sense is we’re better off making sure we can maintain control.
– James Bullard, St. Louis Fed president

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This analysis is provided by xbt.social.

Global Economic Outlook is published every Monday on CCN.LA Readers can follow Bitcoin price analysis updates every day on CCN.LA

Disclaimer

The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.

Charts from TradingView, financial data cartoon from Investing.com, image from Shutterstock.