29 Nov CHINA AND FED SPEAK

Posted at 14:14h in Market Commentary by
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Equites declined amid concern China may have to further tighten its COVID curbs which in turn may create even more societal unrest.  Various newswires have reported the current strife is the greatest since the Tiananmen Square protests of 1989 with “disturbances” reported in Beijing, Shanghai, Hangzhou, Nanjing and elsewhere.

The Newswires indicated a “heavy police presence” utilizing facial recognition to quell, identify and arrest the protestors.  It is largely accepted the Chinese government uses social media to monitor and control its society.

Markets also reacted to Federal Reserve Bank of St. Louis President James Bullard remarks that “financial markets are underestimating the chances that policymakers will need to be more aggressive next year in raising interest rates to curb inflation.”

Bullard further stated “there is still a heavy degree of expectations that inflation will go away naturally” reiterating his view that the Fed needs to at least reach the bottom of the 5% to 7% range to meet policymaker’s’ goal of being restrictive to stamp out inflation near a four-decade high.

NY Fed President John Williams partially confirmed Bullard’s remarks when he stated “I do see a point, probably in 2024, that we’ll start bringing down nominal interest rates because inflation is coming down and we would want to have real interest rates appropriately positioned.”

The FOMC has explicitly stated that it intends to increase nominal interest rates to equal that of the rate of inflation.  Today inflation is about 8% and the nominal interest rate is 4%, thus real interest rates are -4%.

One of two things must occur…either the nominal interest rate increases to the inflation rate, or the inflation rate declines or a combination of the two.

Williams’ remarks further dashed any hopes of a pivot in the intermediate future and is perhaps the first time a fed official has quantified a possible timetable.

Tomorrow FRB Chair Powell speaks.  Will his remarks echo other Fed officials’ remarks?

Oil on the other hand reversed earlier losses of almost 4% to close about 2% higher on reports that OPEC may further reduce output.

Last night the foreign markets were up.  London was up 0.76%, Paris up 0.25% and Frankfurt up 0.14%.  China was up 2.31% Japan down 0.48% and Hang Seng up 5.24%.

Futures are nominally higher as Chinese COVID fears eases slightly.  The 10-year is up 7/32 to yield 3.67%.  Oil extended its rebound-on speculation that OPEC will deepen its supply cuts.

 

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